The Bank of England’s Monetary Policy Committee (MPC) today announced that the Bank of England base rate will remain unchanged at 0.5%.
Over the past few weeks, expectation of an imminent rate hike had been dampened by poor economic growth and uncertainty over Brexit – culminating in today’s decision to put off a rise for at least another month.
Here, we explain how the base rate works, and look at how it affects your mortgage deal and savings accounts.
Bank of England base rate remains at 0.5%
At today’s meeting, the MPC voted to maintain the base rate at its current level.
Up until a few weeks ago, it seemed highly likely that the MPC would vote for an increase at May’s meeting. But a series of economic reports in the past few weeks cast doubt on whether a rate rise may be on the table.
The Office for National Statistics (ONS) reported towards the end of April that the UK’s economy had grown by just 0.1% in the first quarter, the lowest rate since 2012. Meanwhile, CPI inflation fell to 2.5% in March, lower than previously expected.
Looking ahead, the MPC confirmed that any future increases in the base rate ‘are likely to be at a gradual pace and to a limited extent.’
The base rate last changed in November 2017, having been at a record low of 0.25% for the previous 15 months. The increase to 0.5% brought it in back to the level it held over a seven-year period from March 2009 to August 2016.
Despite anticipation of future rises, the current base rate remains significantly below the pre-crash level of 5.25%, recorded in February 2007.
What is the base rate and why is it important?
When the Bank of England lends money to commercial banks, they pay interest at a level determined by the base rate.
This then affects ‘SWAP’ rates – the interest rate banks charge when lending to each other – and these costs are ultimately passed on to customers.
In theory, a higher base rate should mean better rates on savings but more expensive mortgages, but that isn’t always the case.
The rate is decided by the Bank’s Monetary Policy Committee, with a target of keeping inflation as close to 2% as possible.
Base rate stalls: are savers missing out?
While savers might welcome an increase in the base rate – and the promise of better interest rates – history shows that they might not benefit from the full increase.
It’s no secret that savings rates have been disappointing for a long time. November’s increase in the base rate did little to inspire banks to offer better deals.
When we looked at 327 variable instant-access accounts, we found that in the five weeks that followed November’s announcement, only one in five (21%) passed on the full rise to costumers – while nearly half (48%) didn’t change their rates at all.
- If you’re looking for a new savings account, check out the comparison tables from Which? Money Compare
Reprieve for SVR customers
The announcement today is good news for customers with standard variable rate (SVR) mortgages.
Which? research shows that lenders were quick to hike their SVR when the base rate last increased in November, with more than half (53%) of 90 mortgage providers introducing an increase.
Today’s decision means that if you’ve reached the end of your fixed term and are currently on your lender’s SVR, you’ve got a little more time to search for a new deal.
- Learn more about the significance of the base rate in our full guide on the base rate and your mortgage
How cheap are fixed rate deals?
If you’re looking for a new fixed-rate deal, you should be aware that rates may already be starting to creep up.
So far in May, the average two-year fixed rate mortgage has increased in cost from 2.43% to 2.51%, the largest jump since November.
This is in response to SWAP rates increasing in anticipation of a base rate rise this week. And while SWAP rates have in recent days returned to the levels seen in March, providers have been slow to reduce the deals offered to customers.
That said, for the vast majority of homeowners, a fixed-rate deal will still represent much better value than staying on your lender’s SVR.
Does this make tracker mortgages more attractive?
Tracker mortgages are currently available with very tempting initial rates. And with the base rate not moving this month, that could make them seem more attractive.
But be wary of jumping into a tracker mortgage now. As we reported last week, once you factor in a possible base rate increase of 0.25%, those market leading trackers become more expensive than fixed-rate alternatives.
With the possibility of one or more base rate increases looming over the next year, a tracker rate that seems cheap now can end up being far more expensive in the long-term.
- Find out more in our full guide on tracker mortgages
Get advice from a mortgage adviser
Responding to the base rate announcement, David Blake of Which? Mortgage Advisers says: ‘The base rate may have remained firm, but rock-bottom mortgage rates are slowly becoming a thing of the past.’
‘In anticipation of further rate rises, lenders across the market have already started to preemptively increase their mortgage rates, much to the frustration of many homeowners.’
‘While those on variable rates may have had a stay of execution today, mortgage holders should act quickly and consider locking into long-term fixed rates to protect themselves against further rate rises.’