Bank of England interest rates

What's next and how will it affect our finances?

The Bank of England has raised interest rates for the 12th consecutive time, taking the Base Rate to 4.5%. This is the highest level since 2008, and it is having a significant impact on our day-to-day finances.

Many had expected rates to peak at 4.25% but inflation has remained stubbornly high. Andrew Bailey, Bank of England governor, said that the Bank would “stay the course to make sure inflation falls all the way back to the 2% target”.

The move makes mortgages and other debt more expensive, as banks pass on the cost of borrowing money to consumers. It should also ensure we earn more on our savings. However, this is not always the case, since high street banks can be slow in passing on improved rates to their customers.

Those with mortgages are particularly badly affected. Although rates have only risen by a quarter of a point this month, the run of rises means that many of us are paying significantly more for our home loans every month.

Compared with pre-December 2021, average tracker mortgage customers will be paying about £417 more a month, and variable rate mortgage holders about £266 more, according to the BBC.1

For those who are saving, savings rates have risen, although not as fast as mortgage rates. The most recent figures from financial data service Moneyfacts suggest that the average no-notice savings account now pays 2.1% in interest, compared with 0.4% in May 2021. The average two-year fixed rate mortgage is 5.3%.

Decisions to make

Those on variable rate mortgages, those coming to the end of fixed rate mortgages, and those with savings languishing in poorly paying accounts will need to consider what interest rates might do next when making decisions about changing products and what to choose.

Those who believe that interest rates will come down soon may wish to take out a variable rate mortgage, in the hope that they will be able to get a better deal once rates fall. However, those with savings who think rates will fall will want to lock up their savings at higher rates now, so that they get the benefit of high interest on savings for as long as possible.

Those who believe that interest rates will rise, or remain high, may be keener to fix their mortgage rate at the current level, or to take out shorter-term savings deals to take advantage of higher rates in future.

Predicting the future

None of us has a crystal ball to help us to decide what to do next, but there are some indications that we can consider when looking at the future trajectory of interest rates to help us decide.

One of these is the quarterly Monetary Policy Report from the Bank of England’s Monetary Policy Committee (MPC) which sets interest rates. May’s version of this report suggests that rate setters will take a breather from continual hikes during the coming weeks.

Although the report acknowledges that there are still uncertainties around the global financial and economic outlook, it states that members of the MPC expect inflation to slow sharply in coming months. That does not mean that prices will stop rising, simply that they will rise more slowly.2

The report states that the MPC will “monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation”.

This suggests a period without rate rises. However, it adds “if there were to be evidence of more persistent pressures, then further tightening in monetary policy [rate rises] would be required”.

The report forecasts that Bank Rate will fall, but more slowly than suggested in previous reports. This time next year, the BoE believes it will be at 4.4%, falling to 3.8% in two years’ time and then 3.6% by 2026.

Economists from leading international banks have predictions too. Robert Wood, Chief Economist at Bank of America, says that rates will increase once again in June.3

Meanwhile, the International Monetary Fund’s most recent report suggests that, for those who are taking a long-term view, rates will fall over the long term.

Borrowers and savers will have to balance these different views when deciding what to do with different financial products.

Fix or wait?

When deciding whether to take out a fixed rate mortgage or saving product - and if so, for how long - there are a variety of factors to think about. With mortgages, think about the fee you will pay for re-mortgaging as well as the product itself and ensure that you shop around to get the best available deals.

If your current mortgage deal ends in a few months, you may be able to secure a deal with a broker but then wait and see what happens over time before deciding for definite. Speaking to an expert can help with this.

With savings, as well as the rate, consider the tax implications if money is not in an ISA, and think about whether you have an easy-access fund for every day as well if you are tucking money away.

Whatever happens next, carefully watching interest rates and switching to better savings accounts when you can, will help to minimise the impact of rising inflation on your savings, while ensuring you switch from expensive standard variable rates onto better mortgage deals will also save money in most cases.

If you are struggling to pay debt, particularly a mortgage, due to rising rates, ensure you speak to your provider about solutions as soon as possible so that they can put plans in place for you.

17 May 2023