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Rachel Springall

Finance Expert & Press Officer
Published: 02/02/2023
Bank of England

The Bank of England’s Monetary Policy Committee (MPC) voted to increase the base rate by half a percent today. This means interest rates now stand at 4.00%, the highest point since October 2008.

The decision comes at a time when inflation, which measures how prices have increased, has fallen but remains in double digits and at a near 40-year high.  

For much of last year the rising cost of living was exacerbated by increased demand following the COVID-19 pandemic and supply chain constraints which were intensified by the war in Ukraine.

To bring inflation to its 2% target, the MPC voted to increase interest rates throughout 2022. Today marks the 10th consecutive base rate increase, with the first rise occurring in December 2021.

In today’s meeting, the MPC voted by a majority of seven to two to raise the rate by 50 basis points. Of the minority, both members preferred to retain the base rate at 3.5%. 

The decision comes after the US Federal Reserve made a 25 basis point hike to its interest rates yesterday, its smallest increase since March. However, Federal Reserve Chairman Jerome Powell suggested that there could be more rate rises to come.

“While recent developments are encouraging we will need substantially more evidence to be confident that inflation is on a sustained downward path,” he said.

Meanwhile, the European Central Bank (ECB) is set to vote on its interest rates later today.

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 mortgage?

Borrowers coming off their fixed rate deal will be disappointed to see this latest rise to the Bank of England base rate, particularly if they plan to sit on their standard variable revert rate over the shorter-term in the hope that fixed rates will come down before they refinance.

The mortgage market is slowly recovering from the volatility of interest rate uncertainty towards the tail end of 2022, but the markets are expecting both rises and falls to base rate this year.

Lenders tend to pass base rate rises onto SVRs within a few months and a rise of 0.50% on the current average SVR of 6.84% would add approximately £1,536 onto total repayments over two years. These calculations are based on a £200,000 mortgage over a 25-year term on a repayment basis.

The cost of living crisis presents a challenging situation for borrowers with an existing mortgage and those who are looking to get onto the property ladder. First-time buyers with a limited deposit may put their plans on hold until they can more comfortably afford to take out a mortgage.

New buyers play a crucial role in keeping the market moving, but it would be understandable to see caution when affordable housing is in such short supply. Borrowers with an existing deal may struggle to make overpayments and be concerned about future affordability due to unpredictable house prices and interest rates.

What does this mean for your savings?

Interest rates on variable savings accounts are continuing to rise, as several providers have improved their offers since the start of 2023. The influence of the Bank of England base rate rises, along with rate competition, has made a positive impact on variable rate savings accounts, which include Cash ISAs.

Challenger banks and building societies continue to take the most prominent positions in the top rate tables, so savers who fail to review their existing account to the latest top rates may miss out.

Loyalty does not always pay, and the majority of the biggest high street banks have failed to pass every Bank of England base rate rise to easy access accounts, with two brands passing on just 0.54% since December 2021.

As the new tax-year in April draws near, savers may already be comparing ISAs and be pleasantly surprised to see rates are much higher than this time a year ago. Those savers who hope rates will rise further during ISA season may wish to stick to a flexible pot in the meantime so they can quickly take advantage of rate competition.

Savers must also consider their Personal Savings Allowance when comparing ISA and non-ISA accounts, as there are usually differences in the top returns on offer, but ISAs will remain valuable for their longer-term tax-free benefits. Whichever account savers choose, it’s imperative they keep on top of the changing market and compare rates and criteria carefully before they invest.


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