- Bank raises Base Rate by 0.25%, to 5.25%
- The Monetary Policy Committee (MPC) voted by a majority of 6-3 in favour of this latest increase
- Two MPC members voted for a 0.5% increase, while one voted for no increase at all
Laura Suter, head of personal finance at AJ Bell, comments on the latest Bank of England Base Rate rise:
“It might feel like madness to call peak interest rates when the Bank of England has just raised rates for the 14th time, and the market is still pricing in another couple of hikes from the Bank this year. But for consumers this could be peak interest rates, as banks and building societies have started cutting both savings and mortgage rates.
“Slowing inflation means that interest rates aren’t expected to rise by as much as they previously were – a few months ago we were expecting rates to peak at 6.5% but expectations now are 6% or even 5.75%. This has had the knock-on benefit that banks have reduced rates for mortgage customers. We’ve now seen a raft of big banks trim their rates – not sufficiently to make a dramatic difference to people’s monthly repayments, but homeowners will be breathing a sigh of relief that mortgage rates are headed in the right direction.
“Savers are the losers here, as it means an end to the successive savings rate hikes we’ve seen over the past 18 months. It means that anyone who has been playing the waiting game before locking into a fixed rate deal might be wise to move swiftly before rates drop further.
“The big caveat to this is that the next set of inflation data could throw us off course and into turmoil once again. If inflation falls by more than expected next month, that will mean markets likely re-price to expect Base Rate to peak at a lower point – perhaps even at 5.5%. This would play into mortgage holders’ favour and mean lower mortgage rates. However, another surprisingly high inflation figure could mean that we once again go through the cycle of more calls for Bank of England rate hikes, peak rates hitting a higher level and mortgage and savings rates shooting up.”
What should mortgage holders do if peak rates are here?
“You can lock in a new mortgage rate six months ahead of your current fixed-rate deal expiring, and many homeowners will have done this already. If you’re in that camp you should revisit the rate you’ve secured and see if you can get something cheaper now. It might not be a huge saving in monetary terms, but even a small reduction in your monthly repayments can make a big difference over the term of your fix. Just make sure you won’t pay any costs or penalties for ditching the deal you’ve already agreed.
“Of course, anyone on a variable rate mortgage will still see an increase in their costs thanks to today’s interest rate rise. That means another increase in Standard Variable Rates (SVRs) is on the cards, having hit average rates of 7.5% already. It’s still by far the most expensive option and the one that should be avoided at all costs – there’s no sense in the SVR.”
What should cash savers do if peak rates are here?
“Anyone who has been waiting on the sidelines before they pounce and lock-in a fixed rate savings deal might want to get their skates on. In the next couple of weeks we’ll see a rush of savers moving to lock in rates before they are cut further. The same is true for easy-access accounts, as many offer a guaranteed rate for a year or bonus rates to boost your interest – these may start to be cut as rate forecasts are tempered.
“Savings rates are still subject to competition, so we could yet see a savings provider who is hungry for business launch a new top rate. There is also significant pressure coming from government for banks to raise rates, which could push them up – although this is likely to impact average rates rather than push providers to launch new market-beating savings rates.
“All these factors mean it’s impossible to time the market perfectly to nab the highest savings rate of this rate hiking cycle, so savers should lock in at a rate they are happy with or risk missing the peak of the market while they wait for the perfect time. And while savings rates might be dropping slightly, we’re not expecting huge cuts just yet. The Bank of England isn’t expected to start cutting Base Rate until spring next year, and we wouldn’t bank on a huge drop in savings rates until those cuts are closer.”
