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UK interest rates rise: More pain for Brits as Bank of England hikes rates

Bank of England governor Andrew Bailey is set to announce the interest rates decision at noon today

Experts warned Britain might already be in recession today as the Bank of England predicted inflation will top 11 per cent and hiked interest rates for the fifth month in a row.

The Monetary Policy Committee pushed up the base rate by 0.25 percentage points to another 13-year high of 1.25 per cent as it scrambles to rein in rampant prices.

Mortgage-payers were spared an even bigger increase – despite headline CPI inflation now being on course to reach 11 per cent by October – after grim figures showed the UK economy is already going into reverse. 

The Bank believes GDP will fall by 0.3 per cent in this quarter, compared to the 0.1 per cent growth it had pencilled in previously, putting the country on the brink of a full-blown recession.

But analysts are increasingly certain that the MPC will go further next month, with a 0.5 percentage point rise on the cards. Three of the nine members backed that scale of increase today.   

The decision came after the US Federal Reserve imposed a 0.75 percentage point increase – the biggest in decades – as it wrestles with the same problems.  

It is the first time the Bank rate has been above 1 per cent since January 2009.

Communities Secretary Michael Gove admitted the rise was ‘painful’ and warned of tough times to come. But he insisted the Government and the Bank of England had to take action to ‘squeeze’ inflation out of the economy. The Bank’s target is just 2 per cent. 

The pound made significant gains against the US dollar, having been at multi-year lows, as markets concluded that the MPC is going to keep raising interest rates.

Bank of England governor Andrew Bailey is set to announce the interest rates decision at noon today

Bank of England governor Andrew Bailey is set to announce the interest rates decision at noon today

If the Bank of England rate reaches 1.25 per cent as expected it will be the first time since January 2009 it has been higher than 1 per cent

Official figures from the ONS show that CPI would have last been above the April 2022 level of 9 per cent in March 1982 - when it was 9.1 per cent

Official figures from the ONS show that CPI would have last been above the April 2022 level of 9 per cent in March 1982 – when it was 9.1 per cent

How inflation threatens families and the public finances 

Inflation has long been seen as one of the biggest threats to economies.

In extreme examples, it has spiralled out of control and sparked panic.

The German Weimar Republic effectively collapsed after the value of the mark went from around 90 marks to the US dollar in 1921 to 7,400 marks to the dollar in 1921.

In Zimbabwe between 2008 and 2009 the monthly inflation rate was estimated to have reached a mind-boggling 79.6billion per cent.

Although inflation has faded in the minds of Britons who have become used to ultra-low interest rates and stable prices, it caused chaos here in the 1970s.

Deregulation of the mortgage market, the emergence of credit cards and an overheating economy drove the rate to an eye-watering 25 per cent in 1975.

People would rush to buy goods with their wages after pay-day, as the costs were rising so quickly.

Strikes erupted as there was pressure for pay packets to keep pace with prices.

Unemployment rose as the economy tipped into recession, and the government had to pump up interest rates in a bid to bolster the pound and control the surge.

That meant mortgage interest rates spiked into double digits.

And as a result servicing the national debt became a serious problem. 

The nine-person MPC includes governor Andrew Bailey, two deputy governors – Sir Jon Cunliffe and Ben Broadbent – and chief economist Huw Pill.

The MPC has voted for a rise in each of the last four meetings, in December, February, March and May.

However, it has been criticised for not responding quickly enough to rising prices and the overheating labour market. 

Last time three out of nine members of the Monetary Policy Committee already voted for rates to be set at 1.25 per cent.

In minutes of the latest decision, the Bank said CPI inflation is now expected to peak above 11 per cent in October.

The Bank said: ‘CPI inflation is expected to be over 9 per cent during the next few months and to rise to slightly above 11 per cent in October.

‘The increase in October reflects higher projected household energy prices following a prospective additional large increase in the Ofgem price cap.

‘In the MPC’s latest forecasts in May, upward pressure on CPI inflation was expected to dissipate over time.

‘In the main, this reflected the stabilisation of the prices of commodities, albeit at elevated levels, and other tradable goods.

‘It also reflected the combined impact of weaker real incomes and tighter monetary policy on domestic demand. Monetary policy is also acting to ensure that longer-term inflation expectations are anchored at the 2 per cent target.’

Mr Gove warned that the country faces ‘tough times’ ahead due to the global economic ‘correction’ which has resulted from the coronavirus pandemic and the war in Ukraine.

Speaking at The Times CEO summit in London, Mr Gove said: ‘That is painful. We need to be clear that, while Government has a responsibility to help the very poorest at a time when the cost of living is increasing, we also have a responsibility to bear down on the root causes of inflation.

‘We do definitely need to have a monetary policy that squeezes inflation out of the system and that will mean undoubtedly that we need to maintain control of our finances and that we need to ensure in the difficult period over the next few years we are not knocked off our course.

‘I think it is inevitably the case that, when you are squeezing inflation out of the system, you will rely on the Bank of England and the Government having the fiscal and the monetary policies which will inevitably mean we cannot do all the things that we would in ideal circumstances like to do in order to support people through a difficult period.

‘I think it is an unavoidable consequence of central bank policies the UK and others have had to follow.

‘There are inevitably tough times ahead for the UK and the global economy.’

Rupert Harrison, an economist and portfolio manager at financial services company BlackRock, warned the UK may already be in recession and the situation ‘may get worse’ in the autumn.

Mr Harrison, who was also an adviser to George Osborne during his time as Chancellor, told BBC Radio 4’s World at One: ‘I think that for the Bank of England, I have a lot of sympathy for them, they face a very acute and difficult trade-off.

‘We may already be in recession in the UK. It’s very very likely now that the second quarter is going to see negative growth.

‘We may get some mechanical bounce back in the third quarter, partly for complicated reasons due to the Jubilee holiday.

‘But effectively growth is around zero and may get worse as we head into the autumn, particularly with energy prices going back up.’

David Bharier, head of research at the British Chambers of Commerce, said: ‘While expected, the decision to raise the interest rate will add further concern to businesses amid a weakened economic outlook, soaring cost pressures, and labour shortages.

‘The increase signals the Bank’s intention to tackle inflation but businesses have been raising the alarm about spiralling prices since the start of 2021 and a higher interest rate is unlikely to address many of the global causes of this.

‘The increase could impact smaller businesses who may be reliant on banking or overdraft facilities, for instance, those buying goods in bulk in an attempt to offset raw material shortages.’

Meanwhile, former governor Lord King has urged Mr Johnson to level with the public about the ‘inevitable’ hit to living standards.

He said the crisis will be ‘reminiscent of the 1970s’ and suggested the PM has to be honest about what is happening.

‘Our leaders need to give us a clear narrative explaining why recent events will inevitably lower our national standard of living, how that burden will be shared, why it is important to bring inflation down, and why measures to raise economic growth and reduce regional disparities will take many years to come to fruition but will work only if we make a start now,’ he wrote in The Spectator.

GDP was down for the second month in a row in April after a 0.1 per cent dip in March, underlining the 'Stagflation' threat as inflation soars

GDP was down for the second month in a row in April after a 0.1 per cent dip in March, underlining the ‘Stagflation’ threat as inflation soars

Bank of England raises base rate to 1.25% – its fifth hike in six months: What does it mean for mortgage borrowers and savers? 

The Bank of England has upped the base rate for the fifth time since December as it attempts to suppress soaring inflation.

The base rate has risen by 0.25 percentage points from 1 per cent to 1.25 per cent, having been previously upped from 0.1 to 1 per cent during the previous four successive rises.

This is the first time since February 2009 that the base rate has been above 1 per cent, when it was heading downwards following the financial crisis in 2008.

Rate rises: The Bank of England has upped the base rate for the fifth time in six months as it attempts to curb soaring inflation

Rate rises: The Bank of England has upped the base rate for the fifth time in six months as it attempts to curb soaring inflation

Continued inflationary pressure is thought to be behind The Monetary Policy Committee’s decision to raise the rate once again.

However, some economists suggest it will do little to stem the cost of living rises triggered by the higher prices on food and materials coming from abroad and the soaring costs of energy.

It comes a day after the Federal Reserve in the US bumped up its base rate by 0.75 percentage points, to the range of 1.5 per cent to 1.75 per cent – the sharpest rise since 1994.

Savers will be hoping that the base rate rise will mean they get better rates on their savings accounts.

Most homeowners who have fixed rate mortgage deals won’t be affected immediately, but are likely to find remortgaging in future more expensive – depending on property price growth.

Those with variable rate mortgages are likely to see monthly costs rise imminently.

Why raise interest rates?

As of April, CPI inflation stands at 9 per cent, however, the Bank of England has now once again changed the forecast and expects it to peak at around 11 per cent by October.

The MPC voted 6-3 to increase base rate to 1.25 per cent – members in the minority preferred to increase it 0.5 percentage points to 1.5 per cent.

While the Bank of England can’t do anything about global supply problems or energy prices, it can change the UK’s single most important interest rate. 

The base rate determines the interest rate the Bank of England pays to banks that hold money with it and influences the rates those banks charge people to borrow money or pay people to save.

40-year high: CPI inflation is currently stands at 9% - Bank of England's target is for it to be 2%

40-year high: CPI inflation is currently stands at 9% – Bank of England’s target is for it to be 2%

By raising the base rate, it will hope to make borrowing more expensive and saving more lucrative for Britons.

This in theory should encourage people to spend less and save more and therefore help to push inflation down, by dampening the economy and the amount of money banks create in new loans.

Savers will be hoping that the base rate will inject further stimulus into the savings market, particularly given that at present not one savings account gets close to keeping up with inflation.

Mortgage borrowers will be preparing for further rate hikes, having seen rates rise substantially over the past eight months from the record lows seen in October. 

What does it mean for my mortgage?

The rise in base rates has been pushing up the price of mortgages since last year, when they had reached record lows with some deals priced at below 1 per cent. 

How this rise affects borrowers depends on the type of mortgage they have.

For those not on fixed rates the Bank of England decision brings another increase, the second this year, and even those on fixed rates will face increased interest rates when their term ends.

Variable rates

Mortgage holders on their lender’s standard variable rate (SVR), discount deals, or a base rate tracker mortgage will see their payments increase immediately.

As rates have fluctuated over the past year fewer borrowers are choosing variable rates, opting instead for fixed mortgages as a security against the rises.

It is thought that around 12 per cent of mortgages are currently on a standard variable rate, according to UK Finance.

Based on calculations by the trade association, this rate rise will see monthly interest payments for SVRs rise by an average of £15.94 a month to £226, for a mortgage interest rate of 3.31 per cent on an outstanding balance of £76,499.

Moving on up: Thanks to five successive quick fire base rate rises from 0.1 per cent to 1.25 per cent, mortgage lenders have been responding in kind.

Moving on up: Thanks to five successive quick fire base rate rises from 0.1 per cent to 1.25 per cent, mortgage lenders have been responding in kind.

Rachel Springall, finance expert at financial information service Moneyfacts, said: ‘Consumers are facing a cost of living crisis and the back-to-back rate rises are fuelling the mortgage market. 

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‘Borrowers who lock into a fixed deal can protect themselves from future rate rises, but those building a deposit may not be able to afford a mortgage as interest rates and living costs continue to climb.

‘Fixed rates are on the rise, with the average two-year fixed rate rising by almost 1 per cent since December 2021. 

‘As the rate gap between the average two-year and five-year fixed rate has narrowed, fixing for longer may be a sensible choice. 

‘Borrowers could even lock into a fixed mortgage for a decade if they are prepared to commit to such a lengthy fixed term. 

‘Seeking advice is sensible to assess the abundance of deals out there to ensure borrowers find the most appropriate choice based on the overall true cost.’

Potential extra monthly cost from base rate increase
Rate hike £150k mortgage £250k mortgage   £400k mortgage
+0.25% £18 £30  £48 
Credit: Totally Money & Moneycomms       

According to Moneyfacts, switching from a SVR to a fixed rate could significantly reduce someone’s mortgage repayment. 

Based on their calculations the difference between the average two-year fixed mortgage rate and SVR stands at 1.66 per cent, and the cost savings to switch from 4.91 per cent to 3.25 per cent is a difference of approximately £4,418 over two years.

The rise of 0.25 rise on the current SVR of 4.91 per cent would add approximately £700 onto total repayments over two years.

Fixed rates

Fixed-rate mortgages are overwhelming the favourite choice for mortgage holders with an estimated 75 per cent of residential borrowers using this type.

Those on a fixed rate will not immediately feel the effect of the rise, as they are locked into their existing rate until the term ends. 

However, the number of fixed deals ending at any point this year is 1.3million and the rate hike will make it more expensive for those looking to remortgage.

According to Moneyfacts, a typical two-year fixed mortgage across all deposit sizes had an interest rate of 2.34 per cent in December last year which has now risen to 3.25 per cent and is likely to head higher after today’s rise.

On a £200,000 mortgage being repaid over a 25 years, that’s the difference between paying £881 a month and £975 a month.

If average two-year fixed rates were to rise by a further 0.25 percentage points in the aftermath of the base rate rise that figure would increase to £1,001 a month. 

Likewise a typical five-year fixed mortgage had an interest rate of 2.64 per cent in December. This has now risen to 3.37 per cent and again, is likely to only head north.

Analysis by L&C Mortgages has shown that the typical cheapest two-year fixes offered by the ten biggest lenders now stands at more than triple the rates on offer last October, even before the latest rate rise.

Mortgage type Avg rate Oct 2021 Avg rate May 2022  Avg rate June 2022 
Two year fixed rate 0.89% 2.36%  2.71% 
Five year fixed rate 1.05%  2.46%  2.78% 
Standard variable rate  3.82%  4.34%  4.51% 
Source: L&C Mortgages June 2022 

David Hollingworth of mortgage broker L&C said: ‘Those that are in a fixed rate will be protected from the rises currently but should plan ahead as rates are rising rapidly. 

‘It’s possible to secure a rate as much as six months before the end of a deal which could help get ahead of any further rate rises to come.

‘However those currently enjoying a low rate may have to adjust expectation when their deal comes to an end in the future. 

‘There’s potential for borrowers to suffer some rate shock on the expiry of a current low rate and they find that the rate environment has changed. 

‘If they are benefiting from a really low rate now they may even want to overpay to help reduce the mortgage for when they have to switch into a higher rate, although with the cost of living squeeze that will be easier said than done.’

What does it mean for my savings?

While it is potentially bad news for mortgage borrowers, the base rate rise will be welcomed by savers who have seen rock-bottom rates for years.

Were savers to see 0.25 percentage point rise passed onto them, it would mean receiving £50 more a year in interest based on a £20,000 deposit.

The four previous quickfire base rate rises have seen rates ticking upwards at some pace during the first half of the 2022.

The top of This is Money’s independent best buy tables have been a hive of activity, with new market leading rates to report almost every week.

The best easy-access deal now pays 1.52 per cent – more than three time more than was possible this time last year.

The best one-year fixed deal pays 2.6 per cent, whist the best two-year fix pays 3 per cent – the highest seen since early 2013 according to Moneyfacts.

Type of account (min investment)   0% tax 20% tax   40% tax
BONUS accounts – Pay a bonus for the first 12 months or more. These are the rates including the bonus          
UBL Bank (£2,000+)*   1.52  1.22    0.91 
Cynergy Bank Online Easy Access 51 (£1) (1)    1.32  1.06    0.79 
Yorkshire BS Internet Saver Plus 11 (£10,000+)    1.33 1.06   0.80
Al Rayan Bank Everyday Saver 2 (£2,500+)(3)    1.31  1.05   0.79
Marcus by Goldman Sachs (£1+) (2)    1.30 1.04   0.78
* Deal is exclusive via savings platform, Raisin UK. Signup via the link and deposit £10,000 or more and you’ll receive a £25 welcome bonus. You will need to claim via email for the £25 bonus to be paid.
(1) Rates includes a 1.02 percentage point bonus payable for the first 12 months
(2) Rate includes a 0.25 percentage point bonus payable for the first 12 months.
(3) This rate is the ‘expected profit rate’ under Sharia compliant accounts.     

However, whilst the best rates have improved markedly, most savers still have their cash languishing in accounts paying next to nothing. 

There is little sign of this changing for those who choose to not move their cash to another deal.

The biggest high street banks including Barclays, HSBC, Halifax, Lloyds, NatWest and Santander have barely passed on any of the previous base rate rises to their easy-access savers – where the majority of savers keep their cash.

Since the first base rate rise in December last year, Barclays Bank has held its Everyday Saver at 0.01 per cent, while HSBC, Lloyds, Santander and NatWest have increased easy-access rates from just 0.01 per cent to 0.1 per cent.

TSB and Halifax offer savers 0.15 per cent for using their easy-access savings accounts, whilst Nationwide, announced on Tuesday that from July it will be increasing its easy-access deal by just 0.05 percentage points.

The Britain’s biggest building society will move from paying its loyal savers between 0.11 per cent and 0.15 per cent to paying between 0.16-0.2 per cent.

Cash erosion: At present there is not one single savings account that can keep up with inflation

Cash erosion: At present there is not one single savings account that can keep up with inflation

Rachel Springall, a finance expert at Moneyfacts, said: ‘Interest rates on savings accounts are on the rise, which is largely thanks to competition among challenger banks and building societies.

‘Loyal savers may not be getting the best deal and could be missing out on a top rate if they fail to switch.

‘Out of the biggest high street brands, some have passed on just 0.09 per cent since December 2021 and none have passed on all four base rate rises, which equate to 0.9 per cent.’

‘Savers would be wise to review the top rate tables as there have been notable improvements over the past few months.

‘The best deals today may not have a very long shelf life and some may require certain eligibility criteria to be met.

‘However, if savers are prepared to make the effort, they could stand to earn a much better return on their hard-earned cash than if they have their money stored with a big high street bank for convenience.’

How high will rates will go?

We’ve already seen some big milestones reached over the past few weeks and months.

Savers are flocking back to fixed bonds as one-year rates burst through the 2.5 per cent barrier to a seven-year high.

At the start of the year, the best one-year deal was just 1.36 per cent. But you can now earn a top 2.6 per cent from Atom Bank.

Onwards and upwards: Those keeping an eye on the top of the savings best buy tables will have noticed some positive changes.

Onwards and upwards: Those keeping an eye on the top of the savings best buy tables will have noticed some positive changes.

Longer term fix rates have also seen big improvements – albeit the gap between one year deals and five year deals is just 0.65 per cent.

Three savings providers are now offering deals paying 3 per cent or more. Most notably, BLME, which is offering a two-year rate paying 3 per cent and and a five-year deal paying 3.25 per cent.

Meanwhile, the best easy-access deal has jumped from 0.71 per cent to 1.52 per cent since the start of the year.

With inflation likely to reach 10 per cent and further base rate rises expected, along with intense competition amongst challenger banks it is hard to see how rates won’t continue on this same upward trajectory, at least for the foreseeable future.

Type of account (min investment)                   0% tax 20% tax 40% tax
ONE YEAR                         
Atom Bank (£50+)                    2.60 2.08 1.56
Cynergy Bank (£10,000+)                    2.57 2.06 1.54
TWO YEARS                  
BLME (£1,000+)                   3.00  2.40  1.80 
Smartsave Bank (£10,000+)                    2.91 2.33 1.75
Atom Bank (£50+)                    2.90 2.32 1.74

James Blower, founder of The Savings Guru said: ‘It’s impossible to predict where rates are heading exactly but they will continue to rise this year – I’m certain on that because I cannot see a single factor that will lead to rates falling.

‘We also have four new entrant banks who are authorised with restrictions and who will be launching in the second half of the year.

‘New entrants always price very competitively to attract new savers so this will only fuel the market further.

‘I think we will end the year with easy-access best buys around 1.6 to 1.7 per cent and a one year fixed deal nudging towards 3 per cent.’

Where should savers stash their cash?

With rate rises occurring each and every week at the top of the market, savers may feel cautious of switching due to the danger of missing out on a better deal in the near future.

With rates likely to continue moving upwards – driven by competition between challenger banks and further base rate rises, savers may be tempted to remain in easy-access deals so as to remain flexible.

However, the gap between the best one-year fix and easy-access account is now in excess of 1 percentage point.

Of course, given the cost of living squeeze, it’s all the more important to have some easily accessible money to act as a financial cushion to deal with unforeseen events.

However, for those who already have a financial cushion built up and are not planning on using their excess cash towards a large expenditure or investment in the near future, then fixed rate savings could make sense.

Savers looking to maximise their returns should consider a savings platform such as Hargreaves Lansdown’s Active Savings or Raisin UK.

These free platforms not only offer cashback incentives that enable savers to leapfrog the best rates on the market, they also help savers to keep track of their accounts more easily and move money into better rates after signing up.

Raisin is currently offering a £25 welcome bonus to This is Money readers if they open a new Raisin Account via this link or any link originating from our website.

It offers savers the chance to boost their savings by £25 when they open and fund an account on its marketplace with a minimum of £10,000.

And for those with bigger pots, signing up to Hargreaves Lansdown’s Active Savings platform for the first time will get them between £20 and £100 cashback depending on how much money is put in.

Those putting in £10,000 will secure £20, whilst those putting in £80,000 or more will secure £100. However, the biggest percentage point rate boost on savings comes at £10,000.

Raisin is offering the pick of the rates at present. 

A saver depositing £10,000 for the first time in its best one-year deal paying 2.55 per cent could essentially secure a return of 2.8 per cent after the bonus is added.

Its easy-access deal is also the market leader meaning savers wary of fixing their cash can effectively turn a 1.52 per cent return into 1.77 per cent if they take advantage of its exclusive offer.

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