The Impact of the Latest Base Rate Movement

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As we now know, in the first meeting of 2022, the Bank ofEngland voted to increase its base rate from 0.25% up to 0.50%. This has been aresponse to the rise in inflation that we have seen as a result of the COVIDpandemic. The Bank of England has forecast that we will see a height ofinflation at 7.25% come April.

The Bank of England also increase the base rate in 2021 inDecember from 0.15% to 0.25%. This, therefore, comes as the first back-to-backrise to the base rate since 2004.

The base rate is primarily used to stem the growth ofinflation. However, in a country where debt is used increasingly, it ispotentially a concern that the cost of debt will put pressure on individualsand households who may already be feeling the pinch due to the surge ininflation. Therefore, putting them between a rock and a hard place.

What is the Bank of England Base Rate?

The Bank of England base rate is arguably the most importantindicator of the financial horizon of the UK economy. It is set by the Bank ofEngland’s Monetary Policy Committee (MPC) and is a part of monetary policy tocontrol inflation/deflation.

It directly impacts individuals, as when there is a baserate change, it alters the cost of lending from commercial banks. Therefore, anincrease to the base rate would make a mortgage more expensive to take out (orif you’re on a tracker mortgage).

How is the Base Rate Decided?

The MPC sets and announces the base rate. They will meeteight times per year, and then announce their decision. Sometimes there may notbe a change at all. There are nine members of the MPC, and they will debate andconclude on which monetary policy they should take. The vote with the majorityvote will be passed.

Note: The latest increase from 0.25% to 0.50% was voted inwith a small margin of 5 voting ‘yes’ and 4 voting ‘no’.

The next meeting with the MPC will occur on March 17thwhere they will decide whether further increases are needed.

What does a Changing Base Rate Mean?

Reduction in Base Rate

–         If interest rates are reduced, then it makes theact of lending cheaper. This means that more people are likely to take outloans/mortgages and therefore spend more money. This can have an inflationaryimpact upon the economy (housing prices rise etc)

Increase in Base Rate

–         If the interest rate increases, then lendingbecomes more expensive. In theory, people then reduce their likelihood toborrow money from the bank. This means fewer people buying/selling their homes,fewer loans, and an overall reduction in spending.

–         In this scenario, the goal is generally to causea deflationary effect, and provide more purchasing power for individuals’money.

Is the Base Rate Going to Increase Again in 2022?

We have already seen two base rate rises in quicksuccession. The complexity now is that there is a rising cost of living crisisin the UK. This means that there is a risk in two areas. While the MPC will notwant inflation to get out of control, it also cannot push the interest rates sohigh that it squeezes people out of their properties due to the rising mortgagecost. If people en masse have to sell their property and ‘downsize’ then itcould potentially trigger a property market crisis.

As mentioned, the forecasted inflation rate could reach 7.25%in April, which would be an average rate of 6% YTD in 2022. Unfortunately, furtherinterest rate increases are likely required to stem this growth. Whether thisis a long-term increase, and how much it will increase is still unknown.

Many experts are estimating that we will see a base rate ofbetween 1% and 1.5% by the end of 2022.

How Does the Base Rate Affect Me?

Expensive Borrowing

Mortgage costs will increase as a result of the movement inthe base rate. This will impact those who are on a variable rate mortgageagreement or individuals who are currently looking to buy.

Those who are on a variable rate mortgage will see theirmortgage rate move in alignment with the base rate. While those who are lookingto buy will find that the monthly mortgage rate they may have estimated 6months ago, will now be noticeably higher. Those taking out mortgages that areat the upper-tier of their budget may find that houses they previously lookedat are now no longer affordable. This is even the case if you are seeking a fixed-ratemortgage, as the fixed rate is only locked in once the mortgage has beensigned.

Those on fixed mortgages will not be impacted by thesechanges until your fixed arrangement expires. However, those who are close tothe end of their fixed mortgage rate will likely find that the rate is muchhigher when if they re-mortgage at a new fixed rate.

Savings Rates

It may seem all doom and gloom so far. The silver lining isthat a rise in the base rate will also lead to better savings rates at thebank. This means that if you primarily store your money in the bank, then youwill at least be a little better off than where you were 6 months ago.

However, this is also not guaranteed. As the rate increaseshave only been small so far, it might take another increase before the banksstart offering competitive savings offers. Unfortunately, while a base ratechange is a guaranteed increase in costs for lending, it isn’t always aguaranteed increase in savings rates.