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Base rate rises to 0.75%: What it means for savers and borrowers

Paloma Kubiak
Written By:
Paloma Kubiak

The Bank of England has raised the base rate to 0.75% as expected. Here’s what it means for your mortgage, savings and loans.

Members of the Monetary Policy Committee (MPC) voted by a majority of 8-1 to increase the base rate from 0.5% to 0.75%. One member preferred to maintain the rate at 0.5%.

Widely predicted, the move comes as the Bank tries to curb soaring inflation amid the pandemic, cost-of-living crisis and now the Ukraine Russia war.

Base rate rises are one of the mechanisms the Bank of England uses to try and keep inflation under control (5.5% in January 2022), as higher borrowing costs generally mean people spend less.

This is now the third increase from the historic low rate of 0.1% in December 2021. It rose to 0.25% before climbing to 0.5% in February 2022.

But the base rate could rise even further, with revised forecasts suggesting it could reach 2% by the end of the year. The MPC noted that in the past month, “developments are likely to accentuate both the peak in inflation and the adverse impact on activity by intensifying the squeeze on household incomes”.

The minutes read: “Regarding inflation, the invasion of Ukraine by Russia has led to further large increases in energy and other commodity prices including food prices. It is also likely to exacerbate global supply chain disruptions, and has increased the uncertainty around the economic outlook significantly. Global inflationary pressures will strengthen considerably further over coming months, while growth in economies that are net energy importers, including the United Kingdom, is likely to slow.”

However, the members said that while UK GDP in January was stronger than expected, business confidence has held up and labour market data have remained robust, consumer confidence has fallen in response to the squeeze on real household disposable incomes.

Further, inflation is expected to increase in the coming months to around 8% in Q2 2022 (four times the 2% target) and “perhaps even higher later this year”.

According to AJ Bell, if inflation hits 8%, around 42 million Brits will never have seen it as high in their adult life. Laura Suter, head of personal finance, said: “The CPI measure of inflation last breached 8% in April 1991, meaning anyone under the age of 49 hasn’t seen inflation so high in their adulthood.”

The MPC warned that with rising energy prices, Ofgem’s utility price caps could be substantially higher when they are reset in October 2022. It suggested prices could be around 35% higher. And food price inflation was also expected to rise further, from 4.3% in January.

It stated: “Given the current tightness of the labour market, continuing signs of robust domestic cost and price pressures, and the risk that those pressures will persist, the Committee judges that an increase in Bank Rate of 0.25 percentage points is warranted at this meeting.

“Based on its current assessment of the economic situation, the Committee judges that some further modest tightening in monetary policy may be appropriate in the coming months, but there are risks on both sides of that judgement depending on how medium-term prospects for inflation evolve.”

How will the base rate rise impact you?

Mortgage borrowers

If you’re on a fixed rate mortgage, there won’t be any change until you come to the end of your deal. But for the near two-million borrowers on variable rate mortgages, they can expect the rise to be passed on fairly soon, while those who are remortgaging will also see higher rates trickle through.

Myron Jobson, senior personal finance analyst at Interactive Investor, calculated that those on a typical two-year tracker mortgage deal (80% LTV capital repayment mortgage over 25 years on a property valued at £278,123, the average UK house price), are likely to pay £27 a month more, while those on the average standard variable rate face an addition repayment burden of £32 a month.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, added: “Our mortgages are protected to a large extent by the fact that most of us are on fixed rate deals. New borrowers have also been sheltered from the full impact of the rate rise, because the high street banks are still sitting on such a cushion of cash that they can afford to offer exceptionally cheap deals. However, new rates are starting to creep up, and in February, Moneyfacts put the average two-year deal at 2.44% – up from 2.38% in January but down from a year earlier.

“Meanwhile, anyone on a tracker or standard variable rate has been hit hard. The average SVR jumped 0.15 percentage points in March to an eye-watering 4.61%. It means that it’s well worth considering fixing your rate sooner rather than later if it makes sense for your circumstances.”

Savings rates

Lenders are fast to pass on mortgage rate hikes, but when it comes to savings, providers aren’t quick off the mark to pass on the benefit.

In theory, an increase in the base rate is good news for savers, but not all providers will pass on the full 0.25% rate rise.

Anna Bowes, co-founder of Savings Champion, said: “So far, only 64 of the 158 banks or building societies – or just 40% of the savings market – have announced any changes to some of their savings accounts since the December base rate increase, never mind the one in February. And of those that have made changes, it doesn’t mean that all their savings accounts have increased. Only 33% of all existing variable rate savings accounts have increased by something, but shockingly just 2.3% by the full increase in the base rate of 0.40%.”

Plus, with inflation at a 30-year high (5.5% in January 2022) and with it expected to breach 8% from April, it will become harder for savers to match or beat inflation so money is losing its worth in real terms.

Loan and credit card borrowers

A higher base rate is also likely to impact interest rates on loans and credit cards.

Coles said: “Rising rates bring bad news for borrowers. We’ve got used to bargain basement borrowing over the past few years, so we’re going to have to adjust to paying more on our debts.

“Today’s rate rise will feed into the cost of credit cards, both on existing cards and on new ones, because we always tend to get a round of rate increases when the Bank of England makes a move. After February’s announcement, we had a flood of new cards at higher rates, and Moneyfacts figures show that the average credit card rate jumped to 26.3% in the first quarter.

“If you’ve locked into a fixed rate personal loan, it’s fixed for the life of the loan, but it will make new loans more expensive. It might also make them harder to get your hands on if banks start to worry about our ability to stick to higher repayments.”