Interest Rates reach 15-year highs. How does this affect students?

One of our writers discusses the economic situation in Britain and how it will affect students across the country.

Benjamin Moore
25th October 2023
Pixabay - geralt
On the 19 March 2020, Boris Johnson, then PM, announced in an historic address to the public that students would have to put their education on hold, that socialising would end, and that COVID-19 would change all normal activity as we know it. Johnson declared that ‘we can turn the tide within the next 12 weeks’. On that same day, the Bank of England (BOE) lowered interest rates to the lowest level ever (0.1%) to prepare the government for huge amounts of borrowing and to provide liquidity to the economy to prevent an economic disaster. In contrast, as of October 2023, the BOE base rate stands at 5.25%, the highest in 15 years. How did we get here, what does it mean for the economy and what impact will this have on students?

Since the start of the pandemic, a substantial increase in quantitative easing along with major geopolitical tensions has led to some of the worst inflation in decades. With prices rising rapidly, central banks feared a 1970s inflation scenario, where sustained inflation led to a decade of economic hardship. So, central bankers across the world concluded that the only way to curb inflation was to use the blunt tool of rising rates to hammer economic demand.

So far there is disagreement over how well this strategy has worked, in the US the inflation peaked at 9.1% and is now down to 3.7% (still well above their 2% target). In the UK the situation is much worse, with inflation still at 6.8% (down from the 11.5% peak). Now, the public is feeling the squeeze from both sides, with higher inflation eating away at their wages and higher interest rates increasing the possibility of recession and job losses.

For students, this is daunting for multiple reasons. On one hand, the possibility of recession would be a major blow to the already fiercely competitive graduate job market. On the other hand, students, who have struggled in the cost-of-living crisis, could have to face continually high inflation, eroding the value of their maintenance loan and part-time wages. The other factor students are worrying about is their student loans. For most, student loan rates are directly linked to RPI (retail price index) inflation, meaning the longer inflation lingers the more will have to be paid. Currently, the rate is around 7%. At this rate student loan liability will double every 10 years.

What is next for the economy is unknown. Based on the attitude of central bankers, interest rates are to be expected to stay, ‘higher for longer,’ as US Fed Chair Jerome Powel has said. Determined to tackle inflation, the Central Banks will continue to push the cause of higher rates, even at the expense of rising unemployment or, potentially, a recession.

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