This month, the Bank of England raised interest rates to 3%, making it the seventh straight hike since December.
Since 2008, interest rates have never been higher, and the Bank’s chief economist has warned that more increases are imminent.
At 10% right now, inflation is at a 40-year high and is five times the Bank of England’s target of 2%. The Bank’s top economist, Huw Pill, stated that there is still “much to do” in order to contain inflation.
What will it imply for your finances, when will interest rates change, and when will they rise?
When is the announcement of the interest rate?
The Monetary Policy Committee of the Bank of England meets eight times a year to decide whether to increase, decrease, or maintain interest rates.
The MPC will convene once more on December 15 after its most recent meeting on November 3rd. Its first meeting will take place on February 2nd, 2019.
Despite concerns that raising interest rates could cause a prolonged recession, the Bank is nevertheless committed to doing so.
At a conference that UBS was hosting, Pill stated, “I think there is more to do.” “That’s what we did last week. We’ve done some. There is still work to be done.
Pill added that there are other price-increasing causes, such as Russia’s invasion of Ukraine, which has increased energy costs. The Bank may also be to responsible for the recession. The Bank has additionally cautioned that if interest rates reach the current market consensus of 5.25%, the UK could experience its longest recession in a century.
A five-quarter recession that would begin this winter may result from the present 3% pace.
If interest rates rise in December, it would be the culmination of a year-long trend, and borrowers of mortgages, credit cards, and personal loans would need to get used to higher payments. Those who are considering buying a property might begin to question whether this is indeed the ideal moment to do so.
However, because banks are raising the earnings on savings accounts and cash Isas, savers will have something to look forward to.
In November and December, by how much will interest rates increase?
At the December meeting, rates could increase by as much as one percentage point, according to the consulting firm Capital Economics.
If it does, it will be a significant increase. Although the latest two rate rises were by 0.5 percentage points, interest rates often change by 0.25 percentage points or less.
Since the 2008 rate cuts by the MPC following the financial crisis, there has not been a one percentage point shift.
A rate increase of a whole percentage point, however, is even more uncommon. You must consult the history books to find the month of October 1989, when rates rose from 13.75% to 14.875%.
How will interest rates change in the upcoming year?
In the current market scenario, interest rates could reach a maximum of 5.7% by the spring. While Capital Economics expects rates to reach a peak of 5%, some analysts predict that rates will reach 6% in the summer.
Again, a lot may happen between now and then, so for the time being, these are only predictions, and given the market turbulence, they are regularly altering.
The MPC considers the level of inflation along with what’s happening in the markets and wider economy, such as wage growth and unemployment numbers, to decide whether to alter interest rates and by how much.
How would a hike in interest rates affect my mortgage?
A rise in interest rates will have an impact on homeowners with variable mortgage rates, people whose fixed rates are set to expire, and first-time homebuyers.
A tracker or standard variable mortgage is one of the two million or so homeowners who have a variable-rate mortgage.
According to projections by the financial platform AJ Bell, a rate increase of one percentage point will increase a variable agreement borrower’s annual mortgage costs by £1,296 (or £108 per month). The same percentage point increase on a loan amount of £400,000 will result in an increase in the annual mortgage payment of £2,616 or £218 per month.
According to Laura Suter, head of personal finance at AJ Bell, “that’s a big increase for households who are already finding their finances under pressure from price spikes elsewhere.”
Those whose fixed rates are scheduled to expire in the near future may get a major shock when they refinance. They probably took out their mortgage years ago, when rates were significantly lower.
According to data researcher Moneyfacts, the average rate for a two-year fixed mortgage is currently 6.46%, while the average rate for a five-year fixed mortgage is 6.32%. These two represent the greatest levels since 2008.
How will this affect my savings?
As interest rates rise, savings rates will inevitably increase, which is good news for savers. However, there are two crucial things that savers need to keep in mind.
In the first place, banks and building societies are not required to increase savings rates. Following an MPC announcement, they can wait weeks or even months before doing so. They don’t have to pass the entire rate increase on either. A lender will frequently pass the entire rate increase on to mortgage customers while passing only a portion of it on to savers.
Second, searching around for the greatest deal is still essential. Refrain from assuming your provider will increase your fee. To benefit, you’ll need to actively search for the best rate and change your account. There are some excellent rates available, but because of the chaos in the market right now, savings rates are changing rapidly, with some deals being removed in only a few hours. Therefore, if you see a reasonable rate, you must act quickly.
Nationwide had the best easy-access rate at 5% (for balances up to £1,500), while Vanquis Bank offered the best two-year fixed rate at 5% at the time of writing.