Bank of England raises rates to 15-year high

The Bank of England’s Monetary Policy Committee (MPC) voted to increase the base rate by 50 basis points today, meaning interest rates now stand at 5.00% and a 15-year high.

The hike comes after the Office for National Statistics yesterday reported no change in the UK’s rate of inflation in the 12 months leading to May.

Within its finding, food prices remained elevated and core inflation rose for the second consecutive month.

Meanwhile, after the release of April’s inflation figures, a number of lenders removed their mortgage products on the market to price in the potential for higher base rate increases. With these rates returning to market, the average two year fixed deal reached 6% on Saturday.

In today’s meeting, the MPC voted by a majority of seven to two in favour of a 50 basis point increase to interest rates. The two members preferred to keep the base rate at 4.5%. 

In the US, the Federal Reserve decided to hold rates at 5% to 5.25% last Wednesday. However, further rate hikes could be on the cards, according to Jerome Powell, Chair of the Federal Reserve.

“Nearly all Committee participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year,” he said.

“But at this meeting, considering how far and how fast we have moved, we judged it prudent to hold the target range steady to allow the Committee to assess additional information and its implications for monetary policy,” he continued.

Elsewhere, the European Central Bank increased its interest rates to 4% yesterday after announcing the rise last week.

Borrowers may be deeply concerned to see another base rate rise, particularly if they are sitting on a Standard Variable Rate (SVR) or are about to come off a low fixed rate.

Amid a cost-of-living crisis, rising interest rates can have a devastating impact on borrowers who are already struggling to cover their monthly essentials and could well lead to a rise of ‘mortgage prisoners’. Those borrowers who are still on a competitive fixed rate deal for a few more years may want to consider overpaying their mortgage to reduce the size of their loan.

However, those aiming to refinance on a fixed mortgage right now will find rates are around 3% more than they were a year ago. Despite rising fixed rates, it’s still worth considering a switch from a Standard Variable Rate for more peace of mind to guarantee the monthly mortgage payments, as the average SVR has risen to its highest point in over 15 years.

A rate rise of 0.25% on the current average SVR of 7.52% would add approximately £784 onto total repayments over two years. These calculations are based on a £200,000 mortgage over a 25-year term on a repayment basis.

Affordability remains a key concern for any borrower, some first-time buyers may put their plans to jump onto the property ladder on hold in hopes the housing supply shortage will improve and interest rate volatility calms.

It is imperative new buyers can comfortably build a large enough deposit and meet their mortgage repayments, which may be challenging to meet if they have limited disposable income. Consumers looking to remortgage may find it difficult to afford higher interest rates, so seeking independent advice is essential to consider every option available to them, such as downsizing.

A flurry of savings rate competition and consecutive Bank of England base rate rises continue to improve the savings market.

Those savers earning variable rates of interest who take time to review their existing pots may find more attractive returns are available elsewhere, as their loyalty has not been rewarded. The top easy access accounts pay around 4%, with the market average around 2%, however, some of the biggest banks pay much less.

Shopping around for a better deal is imperative in a volatile interest rate environment, so keeping an eye on the top rate tables and signing up to newsletters is wise. Challenger banks and building societies continue to offer some of the top returns and have the same deposit protections in place as the more familiar high street banks, so there is little reason to overlook them in favour of a well-known brand.

Those savers making plans for their investment must choose the right account that suits their short or longer-term goals. Easy access accounts may be more appropriate for someone who may need the funds quickly, whereas notice accounts can be ideal for those planning to use their nest egg in a few months’ time, and they can also utilise their ISA allowance by using those that sit in the tax-free wrapper.

Consumers with longer-term needs for their savings deposit could fix into a bond and pick a deal that pays monthly interest if they wish to supplement their income. Rising interest rates may also impact those with large pots, as they may breach their Personal Savings Allowance, so seeking advice and keeping on top of the latest deals to surface is essential.