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Editorial Team

Published: 03/08/2023
Bank of England

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The Bank of England’s Monetary Policy Committee (MPC) voted to make its 14th consecutive base rate increase today. The latest 0.25 percentage point rise means interest rates now stand at 5.25%, a new 15-year high.

The hike follows a month in which UK inflation saw a larger than expected drop to 7.9%. Despite the fall, the Bank of England expects inflation to drop to 5% by the end of the year and reach its 2% target by the beginning of 2025. 

In today’s meeting, the MPC voted by a majority of six to three to raise interest rates by 25 basis points. Two members preferred to raise the base rate by 50 basis points while one member preferred to keep interest rates at 5%.

In the US, the Federal Reserve increased interest rates to a 22-year high last week. Despite its latest inflation figures falling to an annual rate of 3%, the latest rise means its interest rates stand at 5.25% to 5.5%.

Jerome Powell, Chair of the Federal Reserve, maintained that returning inflation to its 2% target was a priority, and a further rise would occur in September “if the data warranted”.  

“Everything we do is in service to our public mission. We at the Fed will do everything we can to achieve our maximum employment and price stability goals,” he said.

Last Thursday, the European Central Bank (ECB) said it will raise its interest rates by 25 basis points. Taking effect yesterday, it now stands at 4.25%, 5.50%, and 3.75% respectively.

For July, inflation fell to 5.3% but at the time of the ECB’s decision it stood at 5.5%.

Christine Lagarde, President of the ECB, said inflation is expected to fall over the rest of the year but remain elevated above the central bank’s 2% target.

How are interest rates and inflation linked?

Interest rates are often used as a means to control inflation. This is explained in our guide in more detail. 

What does this mean for our savings?

Savers may be delighted to see a rise to interest rates, particularly those who use their pots to earn an income. The savings market has benefitted from consecutive base rate rises and an injection of much-welcomed competition, particularly from challenger banks looking to raise funds for their future lending.

It is imperative savers take time to review their existing accounts and not presume any base rate rise will be passed onto them, as this is never guaranteed. Those savers who have their cash sitting in an easy access account for convenience may find their loyalty is not being repaid, indeed, savers are earning just 1.50% AER from the Everyday Saver from Barclays Bank, but the top easy access accounts pay more than 4%.

Frustrated savers will need to seek alternative brands which are paying attractive returns, such as from the many building societies and challenger banks.

Those looking to maximise the interest they are earning, but do not wish to tie their cash up for a long time, could consider notice accounts. The returns on notice accounts are much more attractive than flexible easy access accounts, and the top deals in this arena pay more than 5% AER.

It would also be wise for savers to consider their ISA allowance, especially when interest rates are on the rise, as consumers with larger pots could breach their Personal Savings Allowance.

Whichever account savers choose, it is important they are clear on any rules and eligibility criteria an account sets out, and ensure they keep on top of the changing rates to not miss out on an attractive deal.

Looking for the best savings rates?

Make sure to visit the savings charts for the most updated rates. 

What does this mean for my mortgage?

This latest base rate rise will come as disappointing news to borrowers worried about rising mortgage repayments. Those who still have a low-rate fixed mortgage would be wise to overpay where they can, with the aim of reducing their loan and the term of their mortgage.

Interest rates on mortgages are much higher than some may realise, so borrowers will need to ensure they have surplus funds to meet higher repayments when they come off a lower rate deal.

Consumers struggling with their outgoings amid the cost of living crisis, or who have become a ‘mortgage prisoner’, would be wise to seek independent advice to review their situation.

Fixed rate mortgages, for two, five and 10-year terms are around 3% higher on average compared to December 2021 and the average Standard Variable Rate (SVR) has risen consecutively over the same period, so a fixed mortgage can give borrowers some peace of mind by securing their monthly repayment. The rate rise of 25 basis points on the current average SVR of 7.85% would add approximately £794 onto total repayments over two years.

Affordable housing is in short supply and inflated house prices can make it difficult for first-time buyers who are already facing a squeeze on their disposable income due to the cost of living crisis.

It will be crucial for borrowers to consider whether to wait a little longer before they apply for a mortgage, particularly if they need to build up a bigger deposit. Those looking to remortgage may need to explore other options, such as downsizing, if they are not able to change their deal.

Seeking advice is essential for borrowers dealing with this challenging environment.

One option is to speak to our preferred brokers, Mortgage Advice Bureau (MAB)

Oliver Dack, Business Principal at Mortgage Advice Bureau Norfolk & Suffolk, said the latest base rate increase will be difficult for approximately 116,0000 households which are due to come off a fixed rate soon. 

"The next announcement on inflation is the 16th August which could dictate the Bank of England's next move come the 21st September," he said. 

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