With interest rate rises just another way the economy is hitting UK consumers hard, we took a look at what is involved.
Base Rates
The base rate is the interest rate that the Bank of England (BoE) establishes.
The current rate, which governors established at 1.75% on August 4, 2022, represents an increase of 0.5 percentage points (from 0%). Since 1995, or 27 years, this rate has never been higher than it is now.
This was the sixth consecutive increase since the start of December 2021 (0.1%). It represents a movement of 1.65% percentage points over the course of eight months. At the commencement of the pandemic in 2020, decision makers reduced it to a historic low of 0.1%.
Interest Rate Rises – Will They Rise Again?
Every time the BoE meets, analysts and economists expect adjustments. These will either increase or decrease. They are hard for the likes of me or you to call. Do you still recall all the chatter about future negative interest rates? It didn’t take place. So, do not take anything at face value.
Inflation will likely hit 13% in Q4 2022. This is according to the BoE. Meanwhile, the Resolution Foundation is forecasting 15% rates by the start of next year. They will likely remain high throughout 2023. The Bank desires 2%.
It follows that there is still conjecture that the bank must impose higher interest rates to address this. It’s difficult to tell what the rest of the year will bring. However, markets are pricing in a 3% rate in March 2023, and the rate is expected to hit 2.5% next year.
Interest Rate Rises – Decision Time
The Bank of England Monetary Committee, a panel of nine individuals, sets the rate approximately every six weeks. A majority vote determines whether the rate increases, decreases, or remains constant. 8 people voted in favour of a 0.5 point increase in August 2022. Whereas just 1 person preferred a smaller increase of 0.25 to 1.5%. This judgement has a larger majority than past recent ones.
The following meetings will take place on:
September 15, 2022.
November 3, 2022
December 15, 2022
Interest Rate Rises – Its Importance
High street and internet banks and lenders base their interest rates on the BoE rate. This implies that it will affect how much you may earn from savings as well as the cost of borrowing for things like mortgages, loans, and credit cards.
If you have a product with a tracker rate—something that actually changes up or down in step with the BoE rate—there may occasionally be a direct correlation. You’ll notice a shift right away in that situation.
It pays to look about to see if you can find a better deal on other things because you might not notice a change right away, if at all.
Impact On Savings
For savers, the recent base rate increases have been welcome news. Although our interest rates have been extremely low, they started to improve in the latter half of 2021.
Now, easy-access accounts get 1.8% AER while standard savers offer 3.5% AER. Additionally, the Nationwide FlexDirect account offers 5% for a year. These increases are largely attributable to customers receiving better base rates.
However, the banks are under no need to take any action, and even if they do, don’t anticipate a 0.5% increase in the existing rate right now. It might be a gradual increase.
In fact, the banks might not provide you the whole rate change. They frequently only move it up a little. Additionally, if they were already giving extremely low rates, even a small increase wouldn’t improve things. Many banks refuse to alter their rates in any way.
Interest Rate Rises – Mortgages
The tracker rates I previously mentioned are largely found here, and if your mortgage has one of them, your monthly payment will alter immediately.
Although it depends on each mortgage provider, it’s likely that if you’re on the regular variable rate, that rate will go up as a result of this move. Of course, they are free to choose to hike it by more (or less) if they so want.
If you now have a fixed-rate mortgage, nothing will change; however, when the time comes to remortgage for your next agreement, you’ll discover that rates have dramatically increased.
If your repair is scheduled to expire within the next three to six months, it might be better to look into setting up the next one now at the most current rates than to wait until it does.
You might be possible to exit a fix early if you believe you want to take advantage of bargains right away and you’re concerned that higher interest rates will cause them to rise even further. However, you’ll need to account for “early redemption penalties” and new arrangement fees.
