Bank Of England’s Base Rate Continues to Climb As Inflation Soars

The Bank Of England (BofE) has increased its base rate by 0.25% to 1.25%, the second such rise in as many months.

The BofE’s Monetary Policy Committee voted six to three in favour of a 0.25% increase, with the remaining three members backing a higher increase of 0.5%, suggesting the current upward trend is far from over.

With inflation now at a 40-year high (9%) and expected to grow even higher by the autumn to over 11%, when energy bill price caps increase from £1,971 to £2,800, the only way the BofE can control rising prices is by increasing its base rate.

This means the cost of borrowing money can only go one way – up!

This latest increase will typically see an extra £16 added onto repayments each month for every £100,000 borrowed on a variable-rate mortgage and £25 per month for tracker mortgages.

Thankfully, for the 75% of mortgage holders who have fixed-rate mortgages, today’s news will have no immediate effect on their repayments, at least until their current deal ends.

But for the 25% (equating to almost 2 million homeowners) who’ve yet to seek the sanctuary of a fixed-rate deal, the interest rate rises since December alone have added an extra £73 per month to variable-rate mortgage repayments and £125 per month for tracker mortgages.

How high could interest rates go?

Following yesterday’s news of the Federal Reserve increasing its own base rate in the USA by a hefty 0.75%—the biggest single rise by the Fed in 30 years—it’s perhaps no surprise that the BofE has followed suit to try and stem the tide of ever-increasing energy prices across the globe.

But can these current interest rate rises (the highest since February 2009) continue for how long and by how much?

The current ‘worst case’ thinking from analysts within the financial markets sees the current interest rate rise peaking at 3%, with those on the more positive side suggesting a less severe increase up to just 1.75%.

If high inflation begins to tighten its grip (the current rate is almost 5 times the BofE target of 2%), interest rates could spiral even higher than any of the current predictions.

Pete Mugleston, Online Mortgage Advisor’s Managing Director, says: “The problem with a sustained period of high inflation is that the longer it continues, the more it begins to shape all of our expectations. This means if businesses expect prices to continue rising, they will simply follow suit, passing these increases on to the consumer to maintain existing profit levels.

“The same applies to the country’s workforce, who will expect their wages to rise in line with current inflation rates for them to maintain their standard of living. This behaviour makes bringing inflation back down all the more difficult, particularly when interest rates have been at such historically low levels for so long.

“An entire generation of new homeowners have never experienced such an economic environment. This is why, now more than ever since first purchasing your home, it’s vital you look to review your current mortgage package with an experienced mortgage broker and secure your repayments at a manageable level during what’s likely to be a turbulent few years.”

You can read more about how the Bank of England’s base rate affects mortgages in our standalone guide.