The Bank of England has recently announced that it will increase its Base Rate by 0.25%, marking its 11th consecutive rise, and pushing interest rates to 4.25%, the highest they've been in 14 years. This move by the Bank is an attempt to tackle high levels of inflation. The rate of inflation has unexpectedly climbed to 10.4% in February, which is still far above the Bank's target of 2%.
However, aside from inflation, the Bank has other factors to consider. In recent weeks, events such as the collapse of Silicon Valley Bank in the US and the rushed buy-out of Swiss bank Credit Suisse have caused uncertainty in the financial markets, leading the Bank to prioritize maintaining financial stability.
At the end of February, the markets expected the Bank to raise rates at its next meeting in March, given the Bank's continued priority of combating high inflation. However, the recent events mentioned above gave the Bank another issue to consider, and the markets began to think that a rate rise in March was less likely.
Then, on March 15, Chancellor Jeremy Hunt presented his Spring Budget and stated that he expected inflation to fall back to 2.9% by the end of the year. This was viewed positively by the markets, and suggested that interest rates had either already peaked or were about to peak.
However, the following week, the UK inflation report was published, showing an unexpected increase to 10.4%, causing the Bank to focus on increasing interest rates again to bring inflation back towards its target of 2%.
One of the impacts of the Base Rate increase is on mortgage rates. Changes to the Bank's Base Rate matter because it could impact how much interest one would pay on loans, including mortgages. Those on fixed-rate deals will not see any changes to their monthly payments, but for those on variable or tracker mortgages, their payments will almost certainly increase.
Earlier in the year, the markets predicted that the Base Rate might rise to around 4.5% in the summer before starting to fall. However, earlier this month, mortgage rates started to level out after falling from the highs they reached after September's mini-budget announcement.
According to mortgage experts, lenders have largely kept mortgage rates flat in recent weeks while awaiting the outcome of three key events: the Spring Budget, the UK inflation rate report, and the Base Rate decision. This suggests that current mortgage rates already factor in a rate rise in March, so it is unlikely that we will see mortgage rates increase following the decision.
Furthermore, the fact that the rate rise is lower than the previous rise, along with the longer-term indication that inflation is still likely to fall sharply over the year, should give lenders more confidence to start to edge down their rates. Lenders will wait to see how markets respond to the Bank's rate rise announcement before they reprice their deals.
Based on the banks decision, the outlook is that 5-year-fixed mortgages are likely to continue to be priced lower than their 2-year fixed-rate products. It is always best to check current average mortgage rates for home-buyers for different deposit and loan sizes, which are updated on a weekly basis.
The Bank of England's next interest rate announcement is scheduled for Thursday, May 11.
So, what does all this mean for you?
The Bank of England's decision to raise its Base Rate may have several implications for consumers. Firstly, those with variable or tracker mortgages will likely see an increase in their monthly payments, as interest rates are directly tied to the Base Rate. Borrowers should be prepared for potential increases in their mortgage payments and may want to consider switching to a fixed-rate mortgage to avoid future rate hikes.
The rising rates may also affect savings accounts, as banks may offer higher interest rates to attract savers. However, consumers should still compare rates and fees to ensure they are getting the best deal.
Higher interest rates may also impact credit card and loan repayments, making them more expensive. Borrowers should review their current debts and consider paying them off sooner rather than later to avoid paying more in interest.
Overall, the rate rise indicates that the Bank of England is taking measures to combat inflation, but consumers should be prepared for potential changes in their financial situation and plan accordingly. It's always a good idea to regularly review your finances and seek advice from a financial advisor if needed.