On 3 February, The Bank of England raised its base rate from 0.25% to 0.5%. It’s the second time in two meetings of the Monetary Policy Committee (MPC) that the central bank has decided to increase rates.
So, with the latest rise, and with more base rate rises predicted later in the year, is the era of ‘cheap money’ coming to an end? Let’s take a look.
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What happened to the base rate on 3 February?
On Thursday 3 February, The Bank of England’s MPC met to decide whether to increase the base rate. The base rate determines the cost at which banks can lend to one another, so it has a huge impact on mortgages and savings rates.
During Thursday’s meeting, the MPC voted to increase the base rate from 0.25% to 0.5%
The FTSE 100 fell slightly, by 20 points or so, following the announcement. However, markets had already anticipated the central bank would raise rates to combat rising inflation. As a result, the rise didn’t come as much of a surprise to investors.
What does the base rate rise mean for mortgages, savings and the stock market?
A higher base rate makes borrowing more expensive. As a result, we can expect the number of cheap mortgages to be cut back.
However, if you’re a homeowner on a fixed-term mortgage, you won’t be immediately impacted by the base rate rise. That’s because your interest rate is fixed. If you’re on your lender’s standard variable rate or a tracker mortgage, then your mortgage payments are likely to rise.
For savers, a higher base rate means banks may become keener to receive retail deposits. As a result, we may start to see savings rates nudge up over the coming days. Despite this, we’re unlikely to see all banks raise their rates by as much as 0.25%. If your provider doesn’t up your interest rate, see the list of the top-rated savings accounts for other options offering higher rates.
For investors, it’s more complicated. As a higher base rate makes borrowing more expensive for businesses, it may encourage them to cut back on future investments. As a result, a higher base rate typically has a negative impact on share prices.
For more on these impacts, see our article that explains what a rising base rate means for you.
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Will the base rate rise again?
The base rate is still very low in historic terms. For example, the base rate went as high as 5.75% in 2007 – a year prior to the global financial crash.
Despite this, it has been predicted that inflation could soar to as much as 7% this year. Currently, inflation is running at 5.4%. If it does head any higher, the BoE is likely to vote for further base rate rises this year. Some analysts suggest that the base rate could go as high as 1.25% by the end of 2022.
Interestingly, four out of the nine members of the MPC actually voted to increase rates to 0.75% on Thursday. As long as these four members don’t have a change of heart and another member votes to raise rates on 17 March, when the committee next meets, then a further base rate rise is likely to happen next month.
If further rate rises do happen, it’s likely we’ll see a sharp cut in the number of 0% deals offered on credit cards. We may also see more expensive mortgages, which will likely lead to lower house prices.
In fact, many blame the era of cheap money as the reason behind the UK’s soaring house prices. That’s because cheap credit pushes up the amount budding homeowners are able to borrow, which can push up prices. If you’re interested in learning more about this, take a look at the latest house price forecast for 2022.
Why could the rise signal the end of ‘cheap money’?
Aside from a higher base rate, there was another signal on Thursday that we may be witnessing the end of the cheap money era.
That’s because the Bank of England also unanimously voted to end new purchases of its bond-buying programme. This programme is another term for quantitative easing (QE), commonly referred to as ‘printing money’.
The BoE has already printed a total of £895 billion in new money. This practice coming to an end may indicate that the central bank is keen to move away from its reliance on new money being pumped into the UK economy. As a result, it’s very possible that the committee’s decision on Thursday signals the begining of the end for the era of cheap money. Only time will tell!
