According to an August 2018 press release from the National Institute of Economic and Social Research, the UK economy has recovered from a soft patch earlier in the year and is now growing at a pace that is at or slightly above potential.

In fact, the UK economy expanded by 0.4 per cent in the second quarter, with the manufacturing and construction sectors recovering after a weak start to 2018.

This came as welcome news to the Bank of England Governor Mark Carney, who made the decision to raise interest rates in November 2017 for the first time in more than 10 years.

At the time, he expected the UK economy to grow at about 1.7% over the next few years, which would also require "about two more interest rate increases over the next three years."

But how does all this impact on everyday life? Here’s a look at how UK monetary policy in today’s modern economy affects both spending and saving.

Interest rates

The move to increase interest rates from 0.25 per cent to 0.5 per cent reverses a cut in August 2016, which was made in the wake of the vote to leave the European Union.

The panel that sets interest rates, called the Monetary Policy Committee (MPC), justified the rate increase by pointing to record-low unemployment, rising inflation, and stronger global economic growth.

In real-world terms, higher interest rates generally:

·         Increases the cost of borrowing - Higher interest means payments on credit cards and loans are more expensive, discouraging people from borrowing and spending.

·         Increase in mortgage interest payments - Again, this has a significant impact on consumer spending, as they'll only have disposable income for covering higher mortgage payments.

·         Incentivises people to save - Put your money in the bank rather than spending it and over time, you'll end up with more.

·         Increases the value of a currency - Along with attracting investors to save money in British banks, a strong UK pound also reduces exports and increases imports.

·         Reduces confidence - Both firms and consumers are less willing to take out risky investments or make purchases.

The everyday impact of interest rates

Higher interest rates do not have the same effect on everyone. However, the winners and losers can be split into two broad categories: savers and spenders.

Winners (Savers) – Along with the 45 million savers who saw a modest lift in their returns immediately after interest rates went up, anyone who wanted to buy an annuity for their pension would have also been offered better deals.

The same could be said for taking out a life insurance policy or modified endowment contract, even if the direct cremation vs cremation debate is making fewer people worried about future nest eggs.

Losers (Spenders) - In addition to causing low consumer confidence on the high street, higher interest rates have meant almost four million households face higher mortgage repayments, especially those with variable rate deals.

The Bank of England estimate that almost two mortgage holders have not experienced an interest rate rise since taking out their policy.