Bank of England interest rate decision confirmed: how it affects your finances
MILLIONS of households will breathe a sigh of relief after the Bank of England left interest rates unchanged again today.
The decision-makers at the Bank’s Monetary Policy Committee (MPC) have now kept interest rates at 5.25% for the fifth time in a row.
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Banks and lenders use the Bank of England’s (BoE) base rate to set the interest rates it offers customers on mortgages, loans and savings.
BoE Governor Andrew Bailey said: ‘In recent weeks we have seen further encouraging signs that inflation is easing.
‘We have again kept interest rates at 5.25% today because we need to be sure that inflation falls back to our target of 2% and stays there.
“We are not yet at the point where we can lower interest rates, but things are moving in the right direction.”
At the last meeting, the MPC voted by a majority of 8 to 1 to maintain the bank rate at 5.25%.
One member preferred to reduce the bank rate by 0.25 percentage points to 5%.
It comes just a day after the CPI measure of inflation fell to 3.4% last month – down from 4% in January and the lowest since September 2021.
Most economists had expected interest rates to be 3.5%.
It means inflation is now closer to the BoE’s 2% target.
Inflation is a measure of how much the prices of everyday goods such as food and clothing, and services such as train tickets and haircuts, are now compared to a year earlier.
Economists generally agree that interest rate cuts will happen later this year.
And the Bank has indicated at recent meetings that cuts are likely in the future.
It would reverse a four-year trend of raising rates or leaving them unchanged at each Bank meeting.
An interest rate cut is expected to reduce mortgage costs for millions of households.
This comes after bank interest rates rose from an all-time low of 0.1% in December 2021.
It was increased to tackle rising inflation.
High interest rates are intended to dampen demand and spending, thereby reducing inflation.
Since September, the bank rate has been held at 5.25% as inflation has declined, easing the burden on mortgage holders.
We explain below what exactly a new rate pause means for your finances.
What does it mean for my mortgage?
When interest rates rise, it usually means that your mortgage costs will increase, depending on the type you have.
Those with fixed rates are usually safe until they remortgage.
However, other mortgages, such as tracker mortgages or standard variable rate (SVR) mortgages, could be immediately affected.
Homeowners with an adjustable-rate mortgage may not see their payments increase immediately, but they are likely to increase shortly after interest rates increase.
But the exact amount depends on your loan and your loan-to-value.
However, if the BoE freezes the current interest rate, your lender may choose to do nothing.
This will come as a huge relief to those who have experienced fourteen consecutive increases in their mortgage bills.
Either way, your bank should warn you of any increase in your rate before it goes up.
We’ve also explained how to find the best mortgage rate.
What is the base interest rate and what impact does it have on the economy?
NINE members of the Bank of England’s Monetary Policy Committee meet eight times a year to set the base interest rate.
Any change in the Bank’s interest rate can have far-reaching consequences as it directly affects:
- The costs that lenders charge people to borrow money
- The amount of savings interest that banks pay to customers.
When the Bank of England cuts interest rates, consumers tend to increase their spending.
This can directly impact the country’s GDP and help move the economy into growth and out of recession.
In this scenario, the cost of borrowing is typically cheap, and the biggest winners are first-time buyers and homeowners with a mortgage.
But those with savings tend to lose.
However, when more credit is available to consumers, demand can increase and prices tend to rise.
And if inflation rises significantly, the Bank of England could raise interest rates to drive prices down again.
When the cost of borrowing rises, consumers and businesses have less money to spend, and in theory prices should also fall as demand for goods and services falls.
The Bank of England is tasked with keeping inflation at 2%, and raising interest rates is one way to achieve this goal.
In this scenario, the losers are the ones in debt.
First-time buyers will lose out on cheaper mortgage rates, and those with variable rate tracker or standard mortgages will usually be hit immediately by base rate increases.
Those with fixed-rate contracts are generally safe if they enter into a contract when interest rates are lower, but their bills can increase dramatically when it comes time to remortgage.
The cost of borrowing through loans, credit cards and overdrafts also increases as the base interest rate rises.
However, the winners in this scenario are those who can save money.
Banks tend to enter the fray by offering market-leading savings rates when the base rate is high.
What does this mean for credit card and loan rates?
Again, if the base rate is increased, the cost of borrowing through loans, credit cards and overdrafts could increase as banks are likely to pass on the increased rate.
Certain loans that you already have, such as a personal loan or car financing, usually remain the same because you have already agreed on the rate.
But rates on future loans could be higher, and lenders could increase rates on credit cards and overdrafts – although they should let you know in advance.
But if interest rate hikes are halted, nothing will likely change.
However, you can still cancel a credit card and have 60 days to pay off the outstanding balance.
What does it mean for my savings?
Savers are the largest group that has actually benefited from the last fourteen interest rate increases at the banks.
That’s because banks tend to enter the fray by offering market-leading interest rates.
Although banks typically act much slower than passing on higher interest rates.
If the base rate does not rise, banks will probably benefit from this and also leave their interest rates unchanged.
Anyone currently getting a low rate on easy-to-access savings might find it worth shopping around for a better rate and moving their money.