It came as no surprise when the Bank of England Monetary Committee raised interest rates to their highest level in 14 years, hitting an unfamiliar โ and uncomfortable 4% earlier this month.
The Committee is charged with keeping CPI inflation across the UK at 2%. However, with the news announced on Wednesday that inflation has increase from 10.1% to 10.4% over the period of January to February, it has consistently missed this target, and is using its main control level โ the interbank lending rate โ to try and put the brakes on price increases.
Following on from the inflation announcement, we have seen an interest rate rise yesterday from the Bank of England to 4.25% - a rise for the 11thย consecutive time.
At Continuum we are asking what impact this will have.
Itโs all about inflationโฆ
The Bank raises interest rates to control inflation.ย Inflation is already starting to fall in Europe and the US, but it's proving far more of a problem in the UK, where higher energy prices, wages and the weak pound are keeping up the pressure.ย
Headline inflation surprisingly rose to 10.4% on Wednesday and we are still a long way from where the Bank believes we need to be.
This could mean further rate increases to come as the BoE tries to bring inflation under control and stabilise the economy.ย 4.25% may not be the end of the cycle of rates rises โ although the latest inflation figures appear to show that inflation has peaked, which could influence the Bankโs thinking.ย
Predicting anything that the future holds is sadly impossible. At the end of last year, the markets were pricing in interest rates rising as high as 5.7% by the spring, while some experts were convinced rates would reach 6% in the summer. But now the same analysts are expecting rates to peak at 4.5% over the summer.ย
But what does it mean for you?
The simple answer is that a rate rise should be good news for savers and bad news for borrowers.
But things are never quite that simple. A rise in bank rate should mean an increase in mortgage repayments, but a mortgage could actually cost you less in the near future.
Trackers which are pegged to the interest rate will increase if the rate rises, but fixed mortgage rates are falling.
This is partly because fixed rates reflect a long term outlook rather than the short term situation, and partlyย ย because ofย ย a price war between banks and building societies, who have lending targets to hit.
While interest rates on new mortgages are shrinking, they are rising across the savings market โ spelling good news for savers starved of decent returns.ย
But banks and building societies are under no obligation to raise the rates they offer, and some will not do so for months. Itโs quite common for a lender to pass the full rate rise onto mortgage customers, but only a fraction of it onto savers.
So the answer is that there could be at least one more rate rise โ but whether you are a borrower or a saver, you need to look carefully at what the effects will be on your particular circumstances, and whether you are getting the best deal from the best provider.
It could be time to look at your savings โ and your mortgage โ with an expert. A call to us at Continuum could be the best way to start.
The Financial Conduct Authority does not regulate deposit accounts.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable mortgage products or savings strategy, you should seek independent financial advice before embarking on any course of action.
Your home may be repossessed if you do not keep up repayments on your mortgage.
https://www.theguardian.com/business/2023/feb/02/bank-of-england-raises-uk-interest-rates-to-4
