There’s been yet another hike to the base rate – is that good or bad?
We’re in a period of rising interest rates, and that could be good or bad for your finances. Here’s more on what to look for.
What is the Bank of England base rate?
The interest rate set by the Bank of England (BoE) is known as the base rate.
The current rate, set on 2 February 2023 is 4%, which marked an increase of 0.5 percentage points. This brings the rate to its highest level in 14 years.
This was the tenth consecutive increase moving from 0.1% in early December 2021, a total change of 3.9% percentage points in just over a year. It was cut to a record low of 0.1% at the start of the pandemic in 2020.
|Date of change||Rate||Change|
|February 2023||4%||+0.5 percentage points|
|December 2022||3.5%||+0.5 percentage points|
|November 2022||3%||+0.75 percentage points|
|September 2022||2.25%||+0.5 percentage points|
|August 2022||1.75%||+0.5 percentage points|
|June 2022||1.25%||+0.25 percentage points|
|May 2022||1%||+0.25 percentage points|
|March 2022||0.75%||+0.25 percentage points|
|February 2022||0.5%||+0.25 percentage points|
|December 2021||0.25%||+0.15 percentage points|
|March 2020||0.1%||-0.15 percentage points|
Could interest rates rise again?
It’s always a guessing game, with analysts and economists predicting changes up or down each time there’s a BoE meeting. I can’t count how many times I’ve prepared articles based on a nailed-on change (according to those analysts) for it not to happen. Remember all the talk that we’d see negative interest rates? It didn’t happen. So take it all with a pinch of salt.
The BoE says inflation will continue to fall from a peak of 11% in October 2022 (it’s now 10.5%) and it’ll be around 4% by the end of 2023. But the Bank wants it at 2% and it could take another two or three years to reach this.
That means there’s still a chance that interest rates will have to keep rising to combat inflation, though it’s not as strong an expectation as in previous decisions.
It’s impossible to definitively say what and when this will happen (if it does happen), but the Bank notes in the minutes of the latest meeting that the market anticipates rates to peak at between 4.5% in the middle of this year, and stay around there for the rest of 2023.
They then predict that the rate will fall to 3.25% in three years’ time – so still a long way from where we’ve been for the last decade and a half. And potentially it’ll
When is the next interest rate decision?
The rate is set every six weeks or so by the Bank of England Monetary Committee, a group of nine people, with the majority vote deciding whether the rate goes up, down or stays the same. The February 2023 decision was 7 in favour of a 0.5 point increase and 2 wanting no increase this time.
The next meetings will be on :
- 23 March 2023
- 11 May 2023
- 22 June 2023
- 3 August 2023
- 21 September 2023
- 2 November 2023
- 14 December 2023
Why it matters
The BoE rate is a large part of what high street and online banks and lenders use to inform the rates they offer. This means it will impact the cost of borrowing on things like mortgages, loans and credit cards, but also how much you can earn on savings.
Sometimes it’s a direct correlation if you have a product with a tracker rate – something that literally changes up or down in line with the BoE rate. In that case you’ll see an instant change.
On other products you might not see an instant change – if at all, so it pays to shop around to see if you can get a better deal.
How it impacts your savings
The recent increases in the base rate have been good news for savers. We’ve been earning very poor levels of interest, but that started to change in late 2021, and has got better and better.
You can now get 5.12% on a current account linked saver, 3.04% AER on an easy-access account and 7% AER on a regular saver (details on these and more here). A large part of these increases is down to improving base rates being passed on to customers.
But the banks don’t have to do anything and if they do make a change, don’t expect there to be an instant 0.5% added on to what’s currently on offer. It might be a gradual boost.
Indeed, the banks won’t necessarily pass on the full rate change to you. Often they’ll just nudge it up a little. And if they were already offering very poor rates, they’re still going to be poor with a little added on top. Many banks won’t change their rates at all.
The other factor when it comes to setting savings rates right now is customer acquisition. Virgin Money and Chase Bank both launched market-leading rates in early 2022 that were significantly higher than the next best account at the time, and more recently Chip and Kroo have boosted rates to be at the top of the table.
Where rates are continuing to fall is on fixed savings accounts. The best one year fix is now at 4.17%, down from a high of 4.65% last autumn. That’s because the predicted peak of interest rates at 6% is now looking unlikely.
Plus don’t forget that even these better rates we’re seeing are well below inflation rates, currently at 10.5%. So there’s still a massive difference.
The highest-paying savings accounts
- 5.25% AER current account from Barclays (limited to £5,000 deposit)
- 7% AER regular saver from First Direct
- 4.17% AER 1 year fix from Smart Save
- 3.04% AER easy access from Chip (from 11 February)
How it impacts your mortgage
This is primarily where you’ll see those tracker rates I mentioned before, and if your mortgage is one of these you will see an instant change in how much you pay.
If you’re on the standard variable rate then it’s likely that will increase off the back of this change, though it’s down to each mortgage lender. They can of course choose to hike it by more (or less) if they wish.
I’d usually say it’s worth looking to fix if you are on one of these variable rates. They are usually far cheaper, and you can lock in at a rate for two, five or even 10 years, guaranteeing you can afford monthly payments. Obviously the longer you fix for, the higher the rate will be.
However right now fixes have still been falling slightly following the huge increases seen in October, so it might be worth talking to a mortgage advisor to see if they think it’s worth holding off a while.
If you’re already on a fixed-rate mortgage nothing will change, but you will find that when you come to remortage for your next deal that rates are significantly higher.
If your fix is due to end in the next three to six months it’s worth looking now if you can set up the next one at the latest rates rather than wait until it ends.
If you’re worried about further interest rates pushing them up even more, you might be able to exit a fix early if you feel you want to take advantage of deals right now, but you’ll need to factor in “early redemption penalties” and new arrangement fees.
How it impacts other borrowing
Existing loans won’t change, though rates might increase for new ones. You might also see a change in the interest rate pushing up rates on car finance, overdrafts and credit cards. Balance transfer cards could also see shorter terms or increased transfer fees.
However with all of these it makes sense to go for 0% deals if you can get them, or to use your savings to pay for things or clear debts rather than take out new ones.
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