Will the base rate rise again in 2022?

The Bank of England recently upped its base rate from 0.1% to 0.25%. But will there be further rises in 2022? Karl Talbot takes a look.

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On 16 December, the Bank of England surprised many by hiking the base rate. Prior to last Thursday, its base rate hadn’t risen for over three years.

So with inflation continuing to hit the headlines, will there be further base rate rises in 2022? And if so, what will it mean for savers and those with mortgages? Let’s explore.


Why did the Bank of England increase the base rate?

The Bank of England’s (BoE’s) recent decision to hike the base rate wasn’t entirely expected. Many hadn’t anticipated that the UK’s central bank would act just days before Christmas, especially as only two of its nine Monetary Policy Committee members voted in favour of a rise in November.

That being said, the BoE’s decision to up its rate to 0.25%, from an all-time low of 0.1%, will have come as a relief to those worried about the current inflation rate. That’s because a higher base rate makes borrowing more expensive, which can help to cool inflation.

Just a day before the BoE’s decision, the ONS reported that the UK’s inflation rate now stands at 5.1%. As a result, the BoE obviously felt it had to act to prevent inflation getting out of control. 

Will there be further base rate rises in 2022?

At 0.25%, the current base rate is still well below historic levels.

To give an idea of just how low it currently is, the base rate touched 5.75% in July 2007. It hovered around 5% for a number of years during the early 2000s, and in the 1990s, it nearly hit 15%!

It’s worth knowing that the BoE has a duty to ensure that the UK’s inflation rate is as close as possible to the government’s annual 2% target. With inflation currently running at more than double this figure, the BoE will almost certainly act again next year.

This view was echoed by the BoE itself. Following its decision to hike its base rate last week, the BoE claimed that a “modest tightening of monetary policy” was “likely to be necessary” to meet its 2% inflation target.

Economists also support the view that the base rate will rise again next year. The futures market predicts that the base rate will hit 0.5% by spring and 1% by the end of 2022.

Meanwhile, the Office for Budget Responsibility has previously suggested the base rate could top 3.5% by 2023.


How does a rising base rate affect savers and mortgage holders?

Base rate rises are a double-sided coin. For savers, a base rate rise generally opens the door to higher savings rates. That’s because a higher base rate means lenders face higher borrowing costs. This may consequently encourage them to offer better deals for savers.

On the flip side, a higher base rate is bad for those looking for a mortgage. That’s because base rate rises go hand in hand with higher mortgage rates. So unless you’re on a fixed-term, the cost of a mortgage essentially becomes more expensive.

However, it is worth bearing in mind that the base rate rising from 0.1% to 0.25% is unlikely to cause too many issues for mortgage borrowers. That’s because such a modest increase will add in the region of £30 per month for someone with a 90% loan-to-value mortgage on their lender’s standard variable rate (on an average house).

However, should there be further base rate rises in 2022, this may put pressure on the wider housing market, especially if mortgage repayments start to become unaffordable. For example, if higher borrowing costs means homeowners start finding it difficult to keep up with their mortgage payments, this could potentially lead to a property crash, especially if it happens on a large scale.

To learn more about how the Bank of England’s base rate can impact you, see our article explaining what the base rate is.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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