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The Bank of England has hiked up interest rates for the first time since August 2023, amid concerns the Iran War could lead to a lengthy bout of inflation.
For almost a year, the Bank Rate has been set at 3.75% after a drawn-out series of reductions from the high of 5.25% three years ago.
But now, the Monetary Policy Committee has agreed to bump it up by a quarter percent to 4%.
The shift will immediately affect the 510,000 mortgage-holders in the UK who use a tracker to set their interest rate, while those on a variable mortgage will likely also see an impact.
When the bank rate increases, the interest on those loans rises with it, meaning homeowners and businesses will be paying more.
On the other hand, savers might enjoy a boost to the interest rates they are offered by banks to build their nest eggs.
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Why do interest rates change?
The Bank of England tends to change its interest rates in response to falling or rising inflation – meaning the rate at which prices are increasing across the economy.
If the Bank Rate rises, that means mortgage rates rise, which in turn means people have less money to spend on other things.
According to the theory, this fall in demand will lead businesses to offer more competitive prices… thus leading to a fall in inflation, which is the bankers’ intended outcome.
So, if you’re annoyed that you aren’t able to afford to buy nice things as your mortgage gets more expensive, just remember that’s the whole point.
Why are interest rates rising?
Last time interest rates increased, it was in response to Putin’s invasion of Ukraine and the massive rise in energy prices that resulted.
This time, it is in response to the US and Israel’s war on Iran and the massive rise in energy prices that have resulted.
You may be thinking, how will limiting the general public’s spending power have any impact on inflation if it’s caused by the byproducts of messy foreign conflicts?
The Bank of England says that bumping up its rates ‘can’t stop the impact of these kinds of things’, but it ‘can slow down new causes of inflation that follow on from these shocks’.
What do interest rates affect?
Interest rate increases are most keenly felt by people with tracker and variable mortgages.
Tracker mortgages follow the Bank Rate directly, so those monthly payments will increase straight away.
It’s a different story for variable deals, as mortgage-holders will need to hang on to find out how their lender reacts to the rise.
According to banking trade body UK Finance, those with a tracker loan can expect their monthly payments to increase by around £31, while those on a variable deal can expect an increase of around £14.
The vast majority of mortgages in the UK – 87% – are fixed, meaning there will be no immediate change to rates.
But future deals will be impacted by the latest change in rates, and UK Finance analysis suggests around 2.3 million fixed rate deals are due to expire in 2027.
Advice on tracking down the best interest rates can be found on sites such as Money Saving Expert and price comparison providers.
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