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Editorial Team

Published: 11/05/2023
Bank of England

The Bank of England’s Monetary Policy Committee (MPC) voted to increase the base rate by 25 basis points today, meaning interest rates now stand at 4.50% and a near 15-year high.

This is the 12th consecutive rise to the base rate since December 2021. The last time interest rates were higher was in October 2008.

In today’s meeting, the MPC voted by a majority of seven to two in favour of a 25-basis point increase to the base rate. The two members preferred to keep the base rate at 4.25%. 

Inflation currently sits in double digits, some way off the MPC’s 2% target despite falling in April.

This increase follows last week’s decision from the US Federal Reserve to raise interest rates to a 16-year high in the US. This saw interest rates there increase by 25 basis points, rising from 5% to 5.25%.

Federal Reserve Chair JeromePowell adopted a positive outlook, stating that conditions in the banking sector had “broadly improved since early March”, when the collapse of Silicon Valley Bank caused some disruption. He went onto say that they are “committed to learning the right lessons from this episode and will work to prevent events like this happening again”.

Elsewhere, last week the European Central Bank (ECB) also increased interest rates by the same amount to 3.25%. This came into effect yesterday.

What is the relationship between interest rates and inflation?

Increasing the base rate is one way the Bank of England can try to bring inflation under control. This is because a higher base rate encourages people to borrow and spend less, therefore slowing down demand. To read about this in more detail, see our guides on inflation and the base rate.

What does this mean for your savings?

The consecutive Bank of England base rate rises have had a positive impact on variable savings rates, but these rises may not have been passed on to everyone.

As we have seen over the years, loyalty does not always pay, and as some institutions increase their easy access rates through base rate rises and competition, some of the biggest banks are paying less than the market average of around 2%. It will be down to savers to compare their accounts regularly and move elsewhere if they are getting a poor return on their hard-earned cash.

Challenger banks and building societies are currently paying some of the best returns, so it is always worth considering the more unfamiliar brands that have the same deposit protections in place as a big high street bank.

As we edge closer to the mid-way point of 2023, it is a sensible time for savers to take a step back and review their whole portfolio. There have been significant improvements to the top rates over recent months, but easy access accounts remain a traditional home for savers’ cash.

However, there are a few deals that limit the number of withdrawals someone can make, so it’s vital to compare terms and conditions carefully. There has also been a boost to notice account interest rates, which could be a sensible choice for savers who want a decent return, but who do not want to lock their money away in a fixed bond.

ISAs are also worth keeping in mind, but savers must also consider their Personal Savings Allowance when comparing ISA and non-ISA accounts. Whichever deal is appropriate, the market is thriving so savers must keep on top of the latest changes and move quickly to secure a competitive rate.

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What does this mean for your mortgage?

The latest base rate rise will be disappointing news for borrowers who have been unable to refinance onto a fixed rate mortgage, yet another blow to their monthly outgoings amid a cost of living crisis.

Those aiming to lock into a fixed rate mortgage for peace of mind will find average rates have come down slightly over the past month, but as rates average around 5%, this may still be unaffordable for some. The average five-year fixed mortgage rate is lower than the two-year fixed, which may encourage prospective borrowers to lock down their rate for longer.

However, fixed mortgage rates could be unpredictable in the months to come, so some borrowers may even sit on their revert rate waiting for cheaper deals to surface. Whether fixed rates are destined to remain volatile or not, there is still an incentive for borrowers to fix, as the consecutive base rate rises have pushed the average Standard Variable Rate (SVR) to its highest point since 2007.

A rate rise of 0.25% on the current average SVR of 7.37% would add approximately £780 onto total repayments over two years. These calculations are based on a £200,000 mortgage over a 25-year term on a repayment basis. 

Inflated house prices and the relentless impact of the cost of living crisis will be taking its toll on borrowers, and there may be some concerned about whether this is the right time to take out a mortgage. Seeking advice is vital to ensure borrowers can comfortably afford to refinance based on their own individual circumstances.

New buyers looking to get their foot onto the property ladder will still be facing a housing supply shortage and their deposits may not stretch far. These borrowers remain vital to keep the mortgage market moving, so hopefully more positive innovative changes will surface to support these buyers.


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