On the 15th of December 2022, the Bank of England (BoE) raised its interest rate by 0.5% points to now 3.5%.
The interest rate set by the Bank of England impacts many other UK rates, including those pertaining to a mortgage, loan, or savings account. Bank Rate is more commonly referred to as Interest Rate or Base Rate, just so you know, and BoE has raised these rates to combat the increasing inflation. According to them, this is their ‘go-to’ tool for bringing inflation down.
Why the BoE has increased the base rate and what they believe it will accomplish
The BoE website states that they already know how people will be facing higher borrowing costs after interest rates are raised – and that some businesses will indefinitely face higher loan rates as well.
BoE even empathized with UK folks that these steps will make things harder for people, with the already high energy and grocery bills especially. However, their website also states that this was a necessary step they took to lower inflation.
How high will interest rates go and how will this impact the cost of living?
The Bank of England has stated that they will increase interest rates more in order to bring inflation down as much as required by the UK government. How high this interest rate or bank rate will go depends on what happens to the UK economy in the coming months, and how the rate of inflation may be affected over the course of the next few years.
As it stands, the UK’s economic future seems uncertain, so BoE has not provided any precise figures in regard to how high the base rate could climb. With that said, they will continue reviewing the state of the economy and then decide whether an increase in base rate is indeed required every 6 weeks or so.
Their next date to review the interest rate will be the 15th of February, 2023.
Here’s how the increasing base rates might impact the average UK resident:
If you’ve taken a loan or mortgage where you are charged according to a variable interest rate, then you may have to deal with higher repayments. But if you’re on a fixed rate, then there will be no impact on the repayments until the end of your fixed term.
At the same time, it’s worth understanding how different interest rates can impact the way you make the repayments. This mortgage calculator (as provided by the BoE website) is a good way to determine how your monthly payments are going to be affected.
If your savings are in a bank account that pays interest, then you might find higher interest rates on those savings.
Let’s take a more in-depth look into how the above three may be impacted:
Mortgages
According to a survey done by the government-owned English Housing Survey, just below a third of households are currently on a mortgage.
Following a period of really low rates, homeowners are now having to deal with very expensive repayments each month. In fact, BoE has stated that on average, 4m households will be dealing with higher monthly mortgage repayments by next year.
Whenever interest rates increase, around 1.6m people on variable rate and tracker deals tend to see an immediate increase in monthly repayments. The bank rate increase of 3.5% means that folks who are on the usual tracker mortgage will pay around £49 more each month; those on standard variable rate mortgages will pay £31 more.
These increases already come on top of previous interest rate increases – in contrast with pre-December 2021, the average tracker mortgage holder will now be paying approximately £333 more per month, while variable mortgage holders approximately £210 more.
Loans and credit cards
BoE interest rates also impact the amount which is on loans (both bank and car) as well as credit cards.
Even before the latest decision was made, the annual average interest rate in October 2022 was 20.73% (bank overdrafts) and 19.31% (credit cards). It’s possible that lenders may hike prices further in anticipation of higher interest rates next year and beyond.
Savings
Both individual banks and building societies tend to pass on interest rate increases to their respective customers, although the deals currently on offer are much better than anything customers have been getting in recent years.
On the one hand, this means that savers will enjoy a higher return on their money, but on the other, these interest rates will likely not be able to keep pace with the rising prices – due to the current state of the economy, of course.
So, this means that the buying power of cash savings is going to continually fall in real terms.
How will things pan out in the near future?
In a recent assessment, BoE has stated that the current recession will be long although shallow.
Paul Dales, a senior UK economist, believes that the base rate will likely remain above 4% next year before it falls in 2024 – this appears to be accurate as the Bank of England is currently focused on ridding inflation from the UK economy.
However, plenty of other economists have stated that rate cuts might come in the spring of 2023 to avoid the current recession spiraling out of control and turning into a slump.
This sparks interesting questions: are other countries also increasing their interest rates?
The UK is, in fact, affected by prices that have been rising globally – there’s definitely a limit to how effective the bank rate rises in the UK will be. At the same time, it’s interesting to note how other countries are taking a very similar approach – i.e. raising their interest rates.
The US central bank has announced major interest rate rises – taking its key rate to levels that have been unheard of in the past 13-15 years. Other central banks are also driving rates up, because inflation does not selectively attack specific countries – at present, it has caused serious problems in most of the world’s major economies.
