The base rate affects the interest that is applied to mortgages, loans and saving accounts and is reviewed every six weeks by the Bank of England
The Bank of England has held interest rates once again(Image: DejanMilic via Getty Images)
The Bank of England held interest rates at 3.75% today and lowered its inflation forecast – but warned of continued uncertainty from the Middle East war.
Bank governor Andrew Bailey said higher energy bills are still set to put pressure on households, with the Ofgem price cap rising from this July.
However, policymakers now expect inflation will not rise as high as they did before. The Bank of England now predicts inflation will peak at slightly above 3.25% toward the end of this year – previously, it said it could hit 3.6% in a best-case scenario.
It comes as oil prices have fallen, following an interim peace deal between the US and Iran, while inflation for May also remained unchanged at 2.8%, rather than rising as widely expected.
Mr Bailey said: “We’ve held bank rate at 3.75% today. Oil prices have fallen in recent days, and that’s encouraging. But they’re still higher than before the war.
”Whatever happens in the future, the higher energy prices of the past four months mean there’s already some inflationary pressure in the pipeline.”
This marks the fourth time in a row where the base rate has been left unchanged, in a move that was widely expected by the majority of economists.
The Bank of England monetary policy committee (MPC) voted seven-to-two in favour of keeping the base rate at 3.75%. Two members, Megan Greene and Huw Pill, wanted to increase it to 4%.
The base rate affects the interest that is applied to mortgages, loans and saving accounts. It is the main tool use by the Bank of England to try and control the inflation and is reviewed every six weeks.
The Bank of England has a target of 2% inflation. Higher interest rates help bring down inflation as people tend to spend less money when the rate of borrowing is higher. When people spend less money, price rises slow down.
How does it affect my mortgage?
You should not see any immediate change to your mortgage repayments today, as the base rate has not changed. The impact future base rate decisions have on your mortgage depends on the type of deal you are on.
Tracker mortgages follows the movement of the base rate, so this can go up or down when it is changed. If you have a standard variable rate (SVR) mortgage, then this also generally changes when the base rate is updated, though lenders do not have to pass on the cut or rise in full.
If you have a fixed rate mortgage, you have agreed to pay a fixed amount every month for a set period of time. This means your payments are not affected by the base rate and won’t change until your fixed deal has ended.
Ben Thompson, Director of Home Moving Strategy at Mortgage Advice Bureau, said: “For borrowers approaching the end of their current mortgage deal, the key message is to review your options early.
“While many are coming off historically low fixed-rate products and may face higher repayments, lenders continue to compete for business, and there are competitive deals available for those who are well prepared.”
How does it affect my debt?
If your credit card is linked to the base rate, then you should not see any changes today. The average credit card purchase APR is around 36%, according to Moneyfacts.
But not all credit cards are explicitly linked to the base rate. Most credit cards have a variable rate, which means they can fluctuate over time, at the discretion of your lender.
Interest rates on personal loans and car financing are normally fixed. This means if you’re in the middle of an agreement, this should not change even when the base rate is updated, as you have already agreed set repayments.
However, a change in the base rate can impact the rates that are applied to new agreements.
Charlie Evans, Money Expert at Compare the Market, said: “Many providers set their own rates independently of the Bank of England. This means you could still find a more affordable deal by comparing what’s available, depending on your credit score and the type of card you’re applying for.
“For those thinking about taking out a loan or a credit card, make sure you make the minimum payments on time and don’t borrow more than what you can afford to pay back.”
How does it affect my savings?
When the base rate is higher, banks and building societies generally offer better savings rates – but when it is expected to fall, saving rates normally start coming down.
If your savings rate is variable, it can change from time to time. If your money is locked away into a fixed-rate account, then your rate will not change for a set period of time. MoneySavingExpert.com lists the best rates currently available.
Revolut offers 5% for six months on up to £25,000 for new customers, made up of 2.9% variable plus a six month 2.1% bonus. Cahoot also offers 5% on up to £3,000 for up to a year, but the rate is variable.
Chase is also offering 4.5% for new customers, including a 12-month 2.25% bonus. In terms of ISAs, Trading 212 offers 4.51% for newbies, made up of 3.6% variable and a one-year 0.91% bonus.
If you are looking to lock your cash away, MBNA pays 4.85% for a one-year fix, or for a longer term, Afin Bank offers 4.9% for a five-year fix.
Regular savings accounts offer the best rates, but these come with strict terms and conditions. You can normally only make small deposits each month and some accounts restrict how many withdrawals you can make.
Zopa pays 7.1% variable for six months but you can only deposit up to £300 each month.
Clare Stinton, Senior Personal Finance Analyst at Hargreaves Lansdown, said: “You can potentially add hundreds of pounds to your bank balance by simply shopping around.
“Take a few minutes to check what level of interest your cash is earning, if it’s not competitive, it may be time to switch to get your money working harder.”
