The base rate could stay below 2% for the next 30 years, a Bank of England deputy governor has said – even as others warn hikes are on the horizon. So what’s likely to happen to the base rate?
The Bank of England base rate has an enormous impact on your everyday finances, from how much you pay on your mortgage to the amount you earn on your savings.
After hitting a record low of 0.25% in August 2016, the base rate rose to 0.5% in November 2017, and the Bank of England predicts more rises ahead. But is it ever likely to return to the 5% or more seen before the financial crisis?
Which? explains the current predictions for the base rate, and what effects you’ll see on your bottom line.
When will the base rate rise?
A group called the Monetary Policy Committee (MPC) votes on the base rate once a month. Since the November hike, speculation has been mounting that the MPC will make a further increase within coming months.
But when are we likely to see it change?
A widely anticipated rise in May was headed off by poor economic growth and Brexit uncertainty. At the June meeting, the majority of the MPC elected to leave the base rate unchanged. But three voters disagreed, showing that some committee members are ready for an increase.
Now, some observers are predicting an August increase, due to positive growth in the services sector and inflation remaining at 2.4%.
Earlier in July, Bank of England governor Mark Carney hinted that a rise could be on the agenda during a speech at the Northern Powerhouse Summit.
He said: ‘Domestically, the incoming data have given me greater confidence that the softness of UK activity in the first quarter was largely due to the weather, not the economic climate.
‘A number of indicators of household spending and sentiment have bounced back strongly.’
Then again, ONS figures released earlier this week show that wage growth has dipped to 2.7% in the three months to May. And while unemployment remains at a low rate of 4.2%, the claimant count rose. These factors could count against an August rate increase.
As such, it’s currently difficult to predict how the committee will vote when it meets on 2 August.
- Find out more: Bank of England base rate and your mortgage
How high will the base rate go?
Whether next month or next year, it seems likely that the base rate will creep up over coming years. But will it return to the 5% or higher levels seen prior to the financial crisis?
For the foreseeable future, this seems unlikely.
In a speech in Cumbria last week, deputy governor Jon Cunliffe said current predictions were for the rate to rise slowly over the next three years and ‘level off’ at under 2% for the next 30 years.
Earlier in the year, MPC member Gertjan Vlieghe predicted that the UK would see ‘one or two’ interest rate rises per year up to March 2021 until it reached 2%.
And the MPC’s statement following the June meeting said that ‘all members agree that any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent’.
By comparison, prior to October 2008, when markets around the world suffered a crash, the base rate was at 5%, and had been since November 2006.
Indeed, before the turn of the millennium, rates well above 5% were the norm. The chart below tracks the base rate over the past 30 years.
How does the base rate affect you?
It may seem like only bankers have any reason to care about the base rate. But in fact, the August interest rate decision could have a direct impact on your household budget.
The base rate determines how much interest banks pay to borrow money from the Bank of England. When the rate changes, the banks tend to pass these costs or savings on to their customers.
When the base rate goes up, you’re likely to pay more interest when taking out a loan. If you’re on a variable-rate mortgage, you’re likely to see your rate go up. And if you’re hunting for a new fixed-rate mortgage deal, it will probably cost more than before.
On the other hand, your bank may offer you a better rate on your savings, to encourage you to deposit your money with them – though often, banks are slower to pass on increases for savings rates than for mortgages.
Example: if the base rate went up to 2%
So what would happen if the base rate went up to 2% (a 1.5% increase on its current level)?
If you had a standard-variable-rate mortgage, the interest rate was currently 4.5%, and you owed £200,000 on your mortgage, your monthly payments would be around £1,112.
But if that rate increased to 6%, your payments would jump to £1,288 per month.
That’s an extra £176 per month, or £2,112 per year, which could put a substantial strain on your household budget.
- Find out how different interest rates would impact your mortgage with Which? Mortgage Advisers’ mortgage repayment calculator
Of course, you may also earn more on your savings. But most people have smaller savings pots than mortgage loans.
Let’s assume you also had £10,000 in savings, and were earning interest of 1.35% (among the highest available for instant-access accounts).
You’d currently be earning about £135 interest a year. If the interest rate went up to 2.85%, you’d earn £285 interest – a modest increase of £150.
How to beat a rate rise
If you’re anticipating a base rate rise, it’s worth considering the following steps:
- Choose a fixed-rate mortgage deal: if you’re worried that rates will rise, a fixed-rate mortgage will give you certainty about the amount of interest you’ll pay and help you plan for the future. Just keep in mind that rates for fixed-rate deals may already be rising.
- Avoid locking your savings away: you tend to get the best interest rates on your cash by choosing a fixed-term fund, where you lock your money away for a set time period. But if rates do rise, you may miss out on the increases and more appealing deals, so think carefully about whether now is a good time for you to choose a long-term bond.
- Shop around for competitive deals: it’s always important to look for the best possible deal, but especially so when the market is poised for change. You can read our guides on finding the best mortgage deal and finding the best savings rate for tips.