The Bank of England has hiked the base rate to 4 per cent, the tenth consecutive increase since last December which has seen the base rate set to the highest level in 15 years.
The Monetary Policy Committee (MPC) voted by a majority of 7–2 to increase interest rates by 0.5 percentage points in a bid to bring down inflation which currently sits at 10.5 per cent. Two members preferred to maintain the rate at 3.5 per cent.
The Bank said the UK is still set to enter recession this year but it will be shorter than previously thought. It expects the economy to “fall slightly” in 2023 as energy costs and other prices continue to ease.
The Chancellor, Jeremy Hunt, said: “Inflation is a stealth tax that is the biggest threat to living standards in a generation, so we support the Bank’s action today so we succeed in halving inflation this year.
“We will play our part by making sure government decisions are in lockstep with the Bank’s approach, including by resisting the urge right now to fund additional spending or tax cuts through borrowing, which will only add fuel to the inflation fire and prolong the pain for everyone.”
Increasing the rate means higher bills for millions of people including an extra £50 a month in mortgage payments for those on tracker deals. Here is what it means for your bank account.
Mortgages
Some 1.8million customers are due to see their fixed rate mortgage end this year which means they face a decision of whether to fix or move onto a variable deal. Those already on variable rates will feel the pain of a hiked interest rate straight away.
There are several types of variable mortgages including tracker deals which are directly linked to the bank rate. Currently 715,000 households are on this type of deal.
There are also standard variable rate (SVR) mortgages which are not linked to the base rate although banks tend to increase them in line with these rises – 895,000 people are on this type of deal.
Most people are moved to SVR deals once their existing fixed deal, tracker or discount mortgage ends. Interest rates on these deals tend to be higher than most mortgage options and so it is worth speaking to a broker and comparing offers to find the cheapest option.
For those on an average tracker mortgage, with £117,588 left outstanding to pay, the 0.5 percentage point increase will mean an increase of £48.99 in monthly payments while for the average SVR mortgage, which is currently at £73,994, it will increase by £30.81.
Looking back to December 2021, when the base rate was at 0.1 per cent, the average tracker mortgage has gone up by £382.16 a month, or £240.32 for if you were on a SVR.
Many will be wondering whether to fix their mortgage rate now. These rates have come down since the mini-Budget with the average two-year fixed mortgage now 5.45 per cent, while five-year fixed rates are at 5.2 per cent, according to data from Moneyfacts.
However, they are still much higher than this time last year when it sat at 2.52 per cent, on average, for a two-year mortgage and 2.71 per cent for a five-year fix.
Despite this, prices are expected to drop further so it may be best, for now, to move to a tracker or variable mortgage and then fix onto a deal when costs have come down.
Alternatively, it could be worth looking at a long term fix, such as a ten year deal, as there are some cheap deals around.
Virgin Money launched a ten year fixed mortgage at 3.99 per cent yesterday (1 February) for those with a 25 per cent deposit, the first mortgage below 4 per cent since the mini-Budget last year.
Economists feel that interest rates will settle at 2 to 3 per cent with the era of rock bottom rates now over.
The good news is while a rate hike might lead you to assume mortgage rates will increase, lenders have priced in the point increase already and they are therefore expected to reduce further.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “Should the Bank raise rates, base-rate tracker mortgages will immediately adjust and variable rates are likely to follow.
“However, fixed-rate mortgages have been gradually falling in recent weeks and we expect this trend to continue as the market has already priced in a base rate rise.
“We expect five-year fixed-rate mortgages to fall below 4 per cent over the next few months and as inflation comes under control, expect a gradually reducing trend throughout the year with base rate reductions expected at the beginning of 2024.”
More from Saving and Banking
Savings
One of the best outcomes for consumers from rising interest rates is hiked savings rates.
Anna Bowes of Savings Champion said: “A hiked base rate should spark another round of increases to variable rate savings accounts, as these accounts are more reactive to base rate changes as they happen, although it’s rare to see rates move directly in line.”
Experts warn that some providers are better than others at passing on the good news, so it makes sense to shop around.
Fixed saving rates have also started to stall. This is because these accounts tend to be priced by what the market is anticipating will happen to the base rate. Therefore, the fall from a high in October last year is a reflection that the market is now expecting this round of base rate hikes to come to a close shortly – at a lower level than previously thought.
Bowes added: “In just a month, the top one year rate on offer has fallen from 4.25 to 4.16 per cent – and back in October last year the top rate on offer was 4.75 per cent.”
Credit cards and debt
A higher base rate is bad news for borrowers as it leaves them with less disposable income to spend with more of their money gobbled up by interest payments on loans, mortgages, credit cards and overdrafts.
The latest money and credit data from the Bank of England suggested consumers are trying to rein in their spending and reduce their reliance on credit cards, with the monthly rise in consumer credit easing from £1.5bn in November to £0.5bn in December.
This suggests that households are dipping into savings to fund living costs.
Alice Haine, personal finance analyst at Bestinvest, said: “The interest rate on your credit card or overdraft could go up, despite no direct link to a bank rate change, if your lender chooses to pass on the rise in borrowing costs. However, your credit card provider must give you notice before this happens.
“If a credit card interest rate rises, those with hefty debts could explore signing up for a 0 per cent balance transfer credit card that clears the debt with no interest applied for a set period.”
Pensions
The state pension is expected to rise by 10.1 per cent in April 2023 in line with inflation.
Rio Stedford, financial planning expert at Quilter, said: “Although the state pension has increased in line with inflation, some pension plans may not keep pace with inflation, reducing the value of benefits over time. This can result in a lower standard of living and increased financial stress.”
If someone holds a significant amount of cash in their pension, then the interest rate hikes will help produce higher levels of growth, but the rates will not beat inflation.
Those with annuities are likely benefit from the rate increase. Although rates have fallen since the aftermath of the mini-Budget, they are almost 40 per cent higher than the same point last year and today’s news may give them a bump.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said: “Data from our annuity comparison tool shows a 65-year-old with a £100,000 pension could get an income of up to £6,892 per year. This compares to £5,003 at the same point last year.
“People interested in securing a level of guaranteed income for retirement through an annuity could benefit from going online to see what kind of rates are on offer.”
