The Bank of England’s base rate is likely to rise sooner than expected. When it happens, this will impact interest rates on savings, mortgages, and other lending. So how will a higher base rate impact you? And how can you protect yourself from any negative effects? Here’s what you need to know.
[top_pitch]
How does the base rate impact interest rates?
The Bank of England controls monetary policy in the UK. And its base rate determines how much it costs for banks to lend to one another.
A low base rate means banks can lend to customers more cheaply, resulting in lower interest rates for borrowers.
On the flip side, a low rate means banks do not need savers’ cash, as they can already access cheap money. As a result, a low base rate can lead to miserable interest rates on savings accounts.
Currently, it’s an understatement to say that the Bank of England’s base rate is low. That’s because it now sits at 0.1%, which is an all-time low. This is no mean feat considering the central bank was founded over 300 years ago!
When could the base rate rise?
Andrew Bailey, governor of the Bank of England, says that inflation worries have added to economic uncertainties. As a result, he is “monitoring the situation closely” with regard to raising the central bank’s base rate in order to increase borrowing costs.
With hints that inflation is soon set to rise from 3.2% to 4%, well above the government’s annual 2% inflationary target, it seems likely that the base rate will rise next year.
Should this happen, then it would mean interest rates will rise earlier than expected.
What could the new base rate be?
Some critics of the Bank of England say that it has been overly reluctant to raise its base rate in the past, in order to protect homeowners, and to ensure the government can access low interest rates for its growing debt.
Consequently, it is likely that the Bank of England will raise its base rate to just 0.25%, which is where it sat prior to March 2020.
Others feel that the bank may be keen to fend off inflation by upping the rate to 0.5%. Whatever the decision of the Monetary Policy Committee in the near future, it’s fair to say that if the base rate does rise, it will be nowhere near the level seen in 2007, when interest rates nudged close to 6%.
[middle_pitch]
What would a rise in interest rates mean for your wallet?
The Bank of England’s base rate matters to everyone. Yet whether a higher base rate will benefit or harm your wallet will depend on your personal circumstances.
Who benefits from higher interest rates?
A higher base rate increases the cost for banks to borrow money. As a result, a higher base rate almost always leads to higher savings interest rates. This is because banks must work harder to attract customer deposits.
Other beneficiaries of a higher base rate could be first-time buyers. That’s because a higher base rate often leads to mortgages becoming more expensive. This can reduce the overall availability of credit, and may even lead to mortgage defaults for those who are overstretched. If either of these factors happens, house prices may start to fall, benefiting those who are yet to buy their first home.
Who suffers from a higher base rate?
Because a higher base rate will make borrowing more expensive for banks, the cost of mortgages will increase. This will certainly be true for those on a standard variable rate mortgage where interest rates can flex. However, it will also impact those on fixed-term mortgages when it’s time to remortgage.
Other people who may suffer when the base rate rises include those with large debts. That’s because interest rates will increase, making it more difficult to clear balances.
How can you protect yourself from rising interest rates?
Whether you have a mortgage or large debts, there are steps you can take now to lessen the impact of rising interest rates.
If you’re a mortgage holder, take a look at our top-rated mortgage deals to see if you can lock yourself into a low interest rate before it’s too late.
If you have large credit card debts, have a look at our top-rated 0% balance transfer cards to see if you can bag yourself a lengthy 0% period to give you breathing space from higher interest rates.
Alternatively, if you’re looking to borrow now, then getting yourself a 0% purchase card could be a good decision, as shorter 0% deals may be just around the corner.
