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UPDATE 5 MAY: The Bank of England raised its Bank Rate to 1% from 0.75% today.
With inflation running at 7% in March 2022 – its highest level for 30 years – the Bank of England has increased its Bank Rate to 1%.
But what exactly is the Bank Rate, and how could an increase affect you? Find simple answers to the most common questions below…
What is the Bank rate now?
The Bank of England Bank Rate currently stands at 1%. In March 2020 it was reduced from 0.75% to 0.1%, just at the start of the pandemic. For several years prior to that, it had largely remained at the 0.5% mark.
The Bank Rate was raised from 0.1% to 0.25% in December 2021 and was increased again to 0.5% in February 2022, then to 0.75% in March. The current level of 1% could increase further when the next announcement is made on 16 June.
Who decides what happens to interest rates?
The Bank of England’s Monetary Policy Committee (MPC) meets eight times a year (roughly every six weeks) for its nine members to discuss whether to hold the base rate or move it up or down – and by how much.
The MPC considers factors such as the rate of inflation, economic growth and the UK employment rate. Each member then has a vote, with the majority determining the outcome.
The most recent vote to raise the rate to 1% was 6-3 in favour, with one member preferring to keep rates unchanged.
Why has the Bank interest rate increased?
Interest rate rises are used as a tool for the Bank of England to curb rising inflation, the thinking being that, if the cost of borrowing increases, people and businesses will be less willing to take out loans for spending purposes, which would suppress demand and depress prices.
The rate of inflation for March 2022 came in at 7% – more than triple the Bank’s 2% target, set by the government. Many commentators are confident there will be further increases in 2022, and the Bank itself has suggested it could top 8%.
Speaking recently to an online panel organised by the Group of Thirty, an economic consultative group, the Bank of England’s Governor Andrew Bailey said that, while he believed the spike in inflation would be temporary, its climb could ‘be higher and last longer’ due to the current surge in energy prices (more on this below).
Why is inflation rising?
Inflation – the cost of general goods and services – is being driven up by worldwide supply shortages following a return to trading after the Covid lockdowns, as well as the conflict in Ukraine.
The shortage of microchips, which has caused supply issues for items ranging from games consoles to on-board tech for new cars, has been a prime example. A shortage of new cars has, in turn, impacted the used car market which, according to figures from AutoTrader, were 21% more expensive in September compared to the previous month.
Meanwhile, soaring wholesale gas prices have translated into a sharp rise in household energy costs, and the regulator’s price cap rose by a wallet-busting 54% in April. Cheaper fixed rate energy tariffs have disappeared from stock entirely, meaning there are no savings to be gained from shopping around for a better deal.
What does an interest rate rise mean for mortgages?
One of the biggest concerns around a rise in interest rates is the potential impact on the cost of mortgages.
Homeowners with tracker mortgage deals should see an immediate change to their monthly payments, as their rate is directly pegged to interest rates.
In due course, a rate rise will almost certainly affect homeowners paying a standard variable rate (SVR) or discounted deal linked to an SVR, as lenders will adjust this independent borrowing rate too.
Borrowers part-way through a fixed rate deal won’t be affected by an interest rate rise until the offer ends, when they will revert onto their lender’s respective SVR.
However, a market expectation of rate rises will feed into the cost of funding for lenders’ new fixed rate mortgage deals.
You can see what mortgage rates are available at our live table below, by selecting your circ*mstances and criteria.
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Laura HowardEditor
I've been involved in personal finance and property journalism for the past 20 years, editing websites and writing for national newspapers. My objective has always been to offer no-nonsense information to readers that either saves or earns them cash.
