The Bank of England raised the base rate from 0.25 per cent to 0.5 per cent at 12pm today (Thursday 3 February).
Economists widely predicted the move, with inflation heading north of 7 per cent this year the Monetary Policy Committee is expected to increase interest rates further in the coming months.
What does a 0.25 per cent hike mean for your money though? i explains.
Those with cash in the bank are likely to see a very small rise in savings rates, however the best savings deals will almost certainly be reserved for longer term fixed rates.
Banks and building societies have been withdrawing the best rates across easy access, cash Isa and fixed term savings accounts for several weeks.
While another rate rise on Thursday will offer moderate hope to savers, it’s unlikely that money held in existing accounts will see much change.
A rise in the base rate is a vital consideration for all homeowners on their lender’s standard variable rate. If it rises to 0.5 per cent lenders are highly likely to pass that on to borrowers, meaning if you’re on a variable rate your monthly mortgage payment will go up.
On a fixed rate mortgage you are protected from changes in the base rate for the period you fix for. A two-year fix taken today will leave you paying exactly the same amount each month until February 2024. At this point you can choose to remortgage to another deal or lapse on to your lender’s SVR, which will almost certainly mean your mortgage payments jump significantly.
If you’re in a position to remortgage, speak to an independent broker who should be able to help you find a cheaper rate.
Cost of living
The point of raising the base rate is to bring inflation back under control. Whether the Bank of England will manage this in practice is a bit of a moot point.
The majority of inflation is currently being driven by energy prices and those are set internationally. A domestic rate rise will have very limited impact on the rising cost of gas and electricity for households.
The other major driver of inflation is higher food and clothes costs. Those are up because of continued supply chain issues – shipping containers are in short supply pushing up prices for those moving goods around the world.
Brexit has added to the rising cost of living because of higher import taxes putting pressure on businesses that rely on international sourcing. They are passing on these costs to consumers.
Leaving the EU has also put pressure on labour markets as Europeans left the UK, leaving lots of jobs empty.
That makes it a jobseeker’s market, and they’re demanding higher pay. The companies footing that bill are, inevitably, passing these costs on to consumers as well.
It’s unlikely that a rise in the base rate is going to alleviate any of these factors. It’s going to make borrowing more expensive for individuals, businesses and the Government.
One positive following a rate rise should be a stronger pound, something that matters to the overall strength of the British economy and ought to go some way to preserving UK businesses’ purchasing power outside of our borders.
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