Bank of England raises interest rates again

The Bank of England has increased the base interest rate for the second monthly meeting in a row. The rate has now increased from 0.25% to 0.5%.

The previous base rate had been maintained through the COVID pandemic at 0.1%, and the move is seen as a way for banks to try to keep up with rocketing inflation and prepare for the US Federal Reserve to make a similar move in March, the first time that it has raised the main rate since December 2018.

Many financial experts believe that the Bank of England will continue to raise the interest rate throughout 2022 as inflation is expected to keep rising too. However, the frequency and scale of these interest rate increases are hard to predict.

Impact on customers

In theory, an increase on the interest base rate can have a positive impact on some bank customers, since it means that major banks can pass on that increase to savings account customers, giving them a better return.

However, not all banks will pass that increase on, meaning customers won’t benefit at all.

Indeed for many of the high street banks, their easy-access savings accounts have extremely low interest rates. Barclays, Halifax, Lloyds, HSBC, Nationwide, NatWest and Santander are all at 0.01%, with TSB slightly better at 0.02%.

There are other deals available although access to cash for these accounts may be more limited.

The news is worse for borrowers, as banks and mortgage providers are much more likely to cut cheap rates for loans and mortgages. Many have already removed some of their better mortgage deals before the announcement was confirmed on Thursday.

Any customers already on a tracker mortgage, which follows the interest rate, will definitely see a rise. The UK average home price is £276,000 and anyone with an 80% LTV mortgage on a tracker rate will now pay an extra £552 a year.

Customers who are locked into a fixed rate will be unaffected for now, although when their mortgage deal ends they may struggle to find one that is comparable.

Will it work?

The rapid rise of inflation is a concern, and raising the base rate isn’t a magic solution. Part of the problem is that the primary driver behind the inflation rise is energy prices, and those are set internationally. A domestic base rate increase won’t have an effect.

There are many other factors too though — increased food and clothing costs, scarcity of labour which is driving salaries higher (with businesses passing those costs onto consumers), and shipping container shortages.

Many of these factors aren’t likely to be solved by an increase in the base rate, although it will strengthen the pound, which will help boost the British economy as buying goods and services from abroad will cost less. However, this is partially countered by the higher import taxes that are being levied as a result of Brexit.