In the Bank of England’s first meeting of 2022, they voted to increase the base rate of interest from 0.25% to 0.50% in response to a soaring inflation- the first back-to-back rise in 18 years.
The Bank has forecast that inflation will peak at 7.25% in April and concerns continue to grow as the increasing cost of debt puts pressure on households that are already struggling in the cost of living crisis.
In this guide, we will be explaining everything you need to know about the latest interest rate changes, including how they are set and what this could mean for you.
What is the Bank of England Base Rate?
The Bank of England base rate sets the level of interest that commercial banks charge for financial products such as mortgages.
This helps to control the economy by making borrowing more expensive.
Unfortunately this can cause homeowners with mortgages to struggle when interest rates increase, however, it also gives savers a better return.
How Are Interest Rates Decided?
It is the responsibility of the Bank of England’s monetary policy committee (MPC) to set and announce the UK interest rate decisions.
This must be done eight times a year- that’s around one announcement every 6 weeks.
The nine members of the MOC hold regular meetings, debate and then vote on the monetary policy action they should take.
The bank rate decision, along with the meeting minutes, are published at noon on a Thursday and these minutes are then analysed for clues that could suggest rate cuts or rises are soon to come.
What Was the Most Recent Interest Rate Change?
At its meeting on 3rd February 2022, the MPC voted by a majority of 5:4 to increase the bank rate from 0.25% to 0.5% after having forecasted that inflation will peak at 7.25% around April time.
What was the Interest Rate Before?
Between 19th March 2020 and 15th December 2021, the rate had been steadily maintained at a record low of 0.10%.
On the 16th December, the rate increased to 0.25% until it rose again on the 3rd February.
When is the Next Interest Rate Decision?
The next meeting to discuss the interest rate will take place on 17 March 2022. You will be able to find updates on their latest decision here.
What Do Interest Rate Changes Mean?
Lower Interest Rates
If interest rates are low, borrowing money is cheaper. This makes it more appealing for individuals and businesses to borrow and spend more money.
In the event of lower interest rates, the rate of inflation typically rises and the purchasing power or your money decreases.
Rapidly increasing inflation results in goods and services becoming more expensive at a faster rate.
Higher Interest Rates
If interest rates are high, borrowing is less affordable, discouraging people from borrowing and encouraging them to save more as they can get a higher return.
In the event of higher interest rates, the rate of inflation tends to fall, helping the purchasing power or your money to remain steady.
What Does the Recent Interest Rate Increase Mean for Me?
More Expensive Borrowing
Mortgages will be more expensive following the Bank of England’s interest rate rise.
If you are on a standard variable rate mortgage deal, your rate will rise in line with the recent change. The average standard variable rate mortgage customer is likely to pay £15.96 more a month.
If you are on a fixed deal, your mortgage rate won’t be affected until your deal expires, at which point the rates on new deals will likely be much higher.
Greater Saving Rates
The silver lining of increased rates is that the interest rates on savings accounts will also go up, so you can make more bang for your buck.
However, it is always important to check with your bank if your savings account interest rate is increasing.
For more of the latest financial news and updates, check out our handy blog.
Alternatively, if you’re looking for expert help on managing your corporate finance as interest rates increase, please don’t hesitate to reach out to our team at Ryans Chartered Accountants.