Interest rate at 2.25%: what does the rise mean for you?

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 22 September 2022 is 2.25%, which marked an increase of 0.5 percentage points. This is the highest single rate since 1995 – that’s 27 years.

It was widely predicted that it would be a larger increase to 2.5%, but the decision was delayed a week due to the Queen’s funeral. Plus a mini-Budget is going to be delivered by the Government tomorrow adds to the uncertainty of what happens next.


source: tradingeconomics.com

This was the seventh consecutive increase moving from 0.1% in early December 2021, a total change of 2.15% percentage points in nine months. It was cut to a record low of 0.1% at the start of the pandemic in 2020.

Date of changeRateChange
September 20222.25%+0.5 percentage points
August 20221.75%+0.5 percentage points
June 20221.25%+0.25 percentage points
May 20221%+0.25 percentage points
March 20220.75%+0.25 percentage points
February 20220.5%+0.25 percentage points
December 20210.25%+0.15 percentage points
March 20200.1%-0.15 percentage points
The most recent changes to the BoE base rate

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.

However, the BoE now says inflation is likely to reach 10% in Q4 2022 (rather than 11% predicted at the last meeting). The Bank wants it at 2%.

That means there’s still speculation that interest rates will have to keep rising to combat this. It’s hard to say what we’ll get in the rest of the year, but the rate is predicted to reach 5% next year, while markets are pricing in a 5% rate in June 2023.

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 September 2022 decision was 5 in favour of a 0.5 point increase, 3 wanting a larger 0.75% jump and only 1 preferring a smaller hike of 0.25.

The next meetings will be on :

  • 3 November 2022
  • 15 December 2022

(full dates here).

Why it matters

The BoE rate is 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 2.1% AER on an easy-access account and 5.12% AER on a regular saver. There’s also the 5% for one year via the Nationwide FlexDirect account. 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 that were significantly higher than the next best account at the time.

Those initial huge hikes were an attempt to get more people to join their bank and I think that a lot of the movement we’ve seen this year has been in response to Chase and Virgin Money.

Though Virgin did increase their rate a few times, neither did anything after August’s 0.5% increase and neither are best buys right now. So perhaps we’ll see a significant increase from these banks to reclaim their crowns.

And don’t forget that even these better rates we’re seeing are well below inflation rates, currently at 9.8% but predicted to reach 15% this year. So there’s still a massive difference.

The highest-paying savings accounts

  • 5% AER current account from Nationwide (limited to £1,500 for one year)
  • 5.12% AER regular saver from Natwest
  • 3.47% AER 1 year fix
  • 2.1% AER easy access from Al Rayan

Read more about these and the other best savings accounts in my best buys guide

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 to 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 definitely 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

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.

Andy’s podcast

Listen to Cash Chats, Andy’s twice-weekly podcast. Episodes every Tuesday and Friday.

My video on the August 2022 increase

My video on the June 2022 increase

One thought on “Interest rate at 2.25%: what does the rise mean for you?

  1. If you have a child, consider some of the children easy access savings accounts for a higher savings rate. These include Kent Reliance (3.01% up to £25k), Bath Building Society (2.5% up to £5k), Penrith (2.45% up to £10k), Leeds Building Society (2.25% up to £1m). I’ve placed cash in all of those, beats having it all stuck in Chase or Virgin Money!

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