FEBRUARY 3 UPDATE: The Bank of England raised its Bank Rate to 0.5% from 0.25% today.
With inflation at 5.5% in January 2022 – its highest level in 30 years – the Bank of England raised its bank rate to 0.5%.
But what exactly is the Bank Rate and how might an increase affect you? Find simple answers to the most common questions below…
What is the discount rate now?
The Bank of England discount rate is currently at 0.5%. It was reduced from 0.75% to 0.1% on March 24, 2020, just at the start of the pandemic. For several years before, it had largely remained at the 0.5% level. The Bank Rate increased from 0.1% to 0.25% in December 2021 and increased again to 0.5% in February 2022.
Who decides what happens to interest rates?
The Bank of England’s Monetary Policy Committee (MPC) meets eight times a year (approximately every six weeks) for its nine members to discuss whether to maintain the base rate or move it down. up or down – and by how much.
The MPC takes into account factors such as the inflation rate, economic growth and employment rate in the UK. Each member then has one vote, with the majority determining the outcome.
The committee’s next meeting will be in March 2022, with its pricing decision announced on the 17th.
Why has the bank interest rate increased?
Interest rate hikes are used as a tool by the Bank of England to curb rising inflation, the idea being that if the cost of borrowing rises, individuals and businesses will be less inclined to take out loans for spending, which would suppress demand and drive down prices.
The inflation rate for January 2022 was 5.5% – a slight increase from the 5.4% reported in the 12 months to December 2021, and more than double the Bank’s 2% target set by the government. Many commentators are convinced that there will be further increases in 2022.
Speaking recently to an online panel organized by the Group of Thirty, an economic advisory group, Bank of England Governor Andrew Bailey said that while he thought soaring inflation would temporary, its rise could “be higher and last longer” due to the current spike in energy prices (more details below).
Why is inflation rising?
Inflation – the cost of general goods and services – is being driven by global supply shortages following a return to trade after the Covid lockdowns.
The shortage of microchips, which has caused supply problems for items ranging from games consoles to in-car technology for new cars, has been a prime example. A shortage of new cars has, in turn, impacted the used car market which, according to AutoTrader figures, was 21% more expensive in September compared to the previous month.
Meanwhile, soaring wholesale gas prices have resulted in a sharp rise in household energy costs just in time for colder weather, and the regulator’s price cap rose 12% in October. Cheaper fixed-rate energy tariffs have disappeared from stock entirely, meaning there’s no savings to be made by looking for a better deal.
What does rising interest rates mean for mortgages?
The potential impact on the cost of mortgages is one of the biggest concerns surrounding an interest rate hike.
Homeowners with tracker mortgage contracts should see an immediate change in their monthly payments, as their rate is directly indexed to interest rates.
In due course, a rate hike will almost certainly affect homeowners paying a standard variable rate (SVR) or discounted deal linked to an SVR, as lenders will also adjust that independent borrowing rate.
Borrowers midway through a fixed rate deal will not be affected by an interest rate hike until the end of the deal, when they revert to their respective lender’s SVR.
However, a market expectation of higher rates will affect the cost of funding new fixed-rate mortgage offers from lenders, according to David Hollingworth of mortgage broker London and Country.
He said: “We’ve already seen some signs of fixed rate increases and while competition should help keep some offers attractive, it looks like the fixed offer reductions that borrowers have enjoyed in recent months could touch down. their end and even begin in reverse.”
The cost of fixed-rate mortgages has been so cheap in recent months that, according to research by London and Country (October), borrowers could have overpaid up to £2,500 a year if they had neglected to shop around the end of their agreement.
You can see what mortgage rates are available in our live table below, by selecting your situation and criteria.
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