Bank of England makes single biggest base rate increase in 33 years

The Bank of England’s Monetary Policy Committee (MPC) voted to increase the base rate by 75 basis points today, its highest single increase in 33 years. It means the base rate now stands at 3.00%.

The last time the base rate exceeded this figure was in October 2008, when it sat at 4.50%. It was quickly lowered by one and a half percentage points the following month.

The decision comes after a period of political volatility following the former Chancellor Kwasi Kwarteng’s mini-Budget and a month where inflation breached double digits once again.

Currently annual inflation is 10.1%, meaning a typical basket of goods and services is 10.1% more expensive than one year prior. This was largely driven by the increased cost of food, with the Office for National Statistics (ONS) reporting in a separate study that staples like bread had increased by 7% in a year.

The Bank of England (BoE) expects inflation to fall from the middle of next year.

The MPC voted by a majority of seven to two to raise the rate to 75 basis points. Of the minority, one member voted to increase the rate by 50 basis points while the other member voted to increase the base rate by 25 basis points.

The decision comes after the US Federal Reserve made a fourth successive 75 basis point hike to its interest rate yesterday.

“It’s very premature in my view to be thinking about or talking about pausing our rate hike. We have a ways to go,” said Jerome Powell, Federal Reserve Chairman in a live Q&A.

Meanwhile, the European Central Bank (ECB) made the same 75 basis point hike to its rate last week.

“We have now seen successive 75 basis point interest rate increases by ECB. Having been a rate hike laggard, the ECB is now taking strong action to halt soaring inflation,” said Marcus Brookes, Chief Investment Officer at Quilter Investors, a wealth management company.

The unnerving uncertainty surrounding interest rate pricing on mortgages has been widespread over the past couple of months.

This latest base rate rise may well stir further concerns on how this will flow through the market and impact the mortgage repayments of people who are already facing a cost of living crisis. Due to the unpredictable nature of the mortgage market, if you're looking to buy a property or remortgage it's crucial that you seek independent advice from a broker to assess the options available to you.

Amid interest rate rises, fixing for the longer-term may be an attractive choice if you're looking for peace of mind when it comes to monthly mortgage repayments.

However, whether now is the time to take out a new deal really will depend on your circumstances, particularly if you're a first-time buyer struggling to build a deposit and with limited disposable income.

That said, because of record-high house prices, if you're looking to remortgage you may find you have more equity in your home to drop down into a lower loan-to-value bracket, where more competitive interest rates could be found.

It's unknown whether borrowers would be better off coming out of their fixed mortgage deal early to refinance right now, or wait and fall onto their revert rate, because everyone’s circumstances are different.

This is discussed in more detail in our article Concerned about mortgage rates? Here's what you can do

However, sitting on a variable rate doesn't guarantee peace of mind in the months to come. Depending on how long you have left on your fixed deal, you may be prepared to accept an early repayment charge to potentially save on monthly repayments overall by taking a new fixed deal amid rising interest rates.

The average standard variable rate (SVR) has steadily been rising and a further rise of 0.75% on the current SVR of 5.86% would add approximately £2,223 onto total repayments over two years.

This calculation is based on a £200,000 mortgage over a 25-year term on a repayment basis. For a more individual assessment use our online mortgage calculator.

Interest rates on variable cash accounts continue to improve due to a combination of provider competition in the top rate tables and consecutive base rate rises.

If you want the flexibility of an easy access account the average rate is now over 1%, the first time this level has been breached in a decade, and top rates now exceed 2%. However, there are still accounts out there paying less than 1% and, as we've seen in the past, there's no guarantee that savers will benefit from a base rate rise.

The majority of the biggest high street banks have failed to pass the full BoE base rate rises to easy access accounts, with one brand passing on just 0.14% since December 2021. Out of the biggest brands, only HSBC has made notable rises to the rate on its Online Bonus Saver, up from 0.05% to 2.96%, a rise of 2.91% since December 2021.

This improvement is beyond the seven base rate rises which equated to 2.15%, and as many other brands trail behind, it’s vital you compare deals carefully and reconsider any loyalty in favour of a better deal elsewhere.

It's also worth keeping in mind that the HSBC Online Bonus Saver doesn't permit withdrawals to earn 2.96%, and if one or more withdrawal is made the rate would fall to 0.50%, so this type of easy access account may not suit if you're looking for unlimited flexibility during uncertain times.

Challenger banks and building societies currently offer some of the best rates across easy access, notice and equivalent ISAs, but the terms and conditions of these accounts can vary considerably.

During a cost of living crisis, quick access to cash can be a desirable feature to cover any unexpected costs, so you'll need to compare deals carefully at the outset and take into consideration both the interest rate and the accessibility of an account.