What does the Bank of England base rate change mean?


By Beehive Money

Bank of England
As a festive surprise for everyone the Bank of England’s Monetary Policy Committee decided on the 16th December, after one of their eight meetings a year, to increase the Bank Rate from 0.1% to 0.25% - the first rise in three years. Since then, on 3rd February 2022 it was raised again to 0.5%, from 17th March it was 0.75%,  from 5th May it was 1.00% and now, on the 16th June we have seen a further rise to 1.25% which is the highest level in 13 years. The BBC have said "It comes as finances are being squeezed by the rising cost of living, driven by record fuel and energy prices. Inflation - the rate at which prices rise - is currently running at a 40-year high." But what does that mean? Let's dive into some of the jargon and potentially confusing aspects and try to clear up some questions that you might have. 

What is the Bank of England base rate?

  • The Bank Rate, or base rate as it is also known as, is the interest rate paid by the Bank of England to banks and building societies who hold money with them. It then influences what those institutions then charge, feeding into what mortgage borrowers pay and savers earn in interest.
  • It's based on whether the Monetary Policy Committee think the levels of spending in the UK are too high or too low to achieve the UK's inflation target of 2%. If they want to stimulate extra spending, they will lower the rate. This means that loans and mortgage rates will also lower, and this means that people are more likely to spend and therefore they're stimulating the extra spending that they need. This works the other way too if they want to reduce spending if inflation is above their inflation target of 2%. 
  • A higher base rate means mortgage lenders are charged more – and these higher costs are usually passed on to customers in the form of interest rate rises. This is what can be meant when people say, 'mortgage rates going up'. In theory, a higher base rate should mean mortgages get more expensive and that savings accounts pay more interest on your money, but it's not always exactly like this.
  • Check out this useful video on Which? for more information.

Why did the Bank of England base rate change?

  • The Bank of England base rate had been at 0.1% since March 2020, when it was slashed to support the economy in the early days of the pandemic.
  • Since then, we've been seeing prices rising quickly and high rates of inflation. The Bank of England is tasked with preventing prices and inflation from rising too quickly; the inflation target is set by the government at 2% to help keep inflation low and stable. By increasing interest rates, the theory says you then encourage people to save and discourage them from borrowing which takes cash out of the economy and slows the rate of inflation and prices. 

What will I have to do?

  • This change doesn't necessarily mean that savings rates will change that much but you can keep an eye on them if you'd like to.
  • The most important thing to keep a note of when it comes to monthly spending is mortgages. It's most important if you have a tracker mortgage because this will track the base rate and will increase by the same rate that the base rate has. 
  • If you're on your lender's SVR they have the freedom to change this rate so you might want to check that you have the best mortgage deal that you can get. 
  • If you’re on a fixed mortgage rate this change won't affect you but once your fixed rate matures you could go onto your lender’s SVR so it’s best to keep an eye on when your deal ends if you like to know exactly what you’re paying each month.
  • There we have a round-up of some FAQs for the changes to the Bank of England base rate, please reach out to us on social or contact our Customer Advocates if you have any questions.