Last week, the Bank of England held the base rate at 0.75%, as the Monetary Policy Committee took a ‘wait and see’ approach to Brexit. But with the UK’s exit from the EU potentially just weeks away, should you brace for a base rate shock in coming months?
In the early hours of this morning, the prime minister secured a new, flexible extension to Article 50, meaning the UK is now set to leave the EU on 31 October at the latest, but that it could end up leaving sooner.
Changes to interest rates can have far-reaching consequences, on everything from your personal finances to the wider economy.
The Bank of England sets the interest rate – also known as the base rate – in response to current events and expected economic performance to try to keep inflation around its 2% target.
Deal or no deal, Brexit is set to have a seismic impact on the UK economy, so how will the Bank respond, and what will it mean for you?
Why the Bank of England base rate matters
Sometimes known simply as the interest rate, the Bank of England base rate influences how much banks and other lenders charge you to borrow money, and how much interest is paid on your savings.
In the case of a base rate rise, banks will tend to raise mortgage interest rates as well as loans, pushing up the cost of borrowing money. At the same time, interest rates on savings are also likely to increase, meaning your savings pot could grow a little faster.
Lowering the base rate could have the opposite effect, with mortgage rates becoming slightly cheaper, but savings deals offering lower returns.
- Find out more: the Bank of England base rate and your mortgage
Factors that influence the base rate
When setting interest rates, the MPC’s goal is to keep inflation as close to 2% as possible. Its decisions are informed by an inflation forecast, which takes into account:
- the current inflation level
- wage growth
- the cost of goods (including the impact of changes in the exchange rate)
- consumer spending
- investment levels
Interest rate decisions also consider unemployment rates and economic growth figures – the latter of which must not exceed a 1.5% ‘speed limit’ or inflation could rise above target.
The Bank of England puts it like this: ‘Overall, we know that if we lower interest rates, this tends to increase spending and if we raise rates this tends to reduce spending. So, to meet our inflation target, we need to judge how much people intend to save and spend given the current interest rates.’
Timeline: interest rates since the Brexit referendum
As Brexit looms on the horizon, you might wonder how this unprecedented political event might affect the economy. While no one has a crystal ball, it can be helpful to look at what happened to the base rate during the past two years of Brexit votes and negotiations.
August 2016: Just over a month after the referendum on EU membership, the Bank of England cut the base rate in half – from 0.5% to 0.25%. This was the first time the interest rate had changed since March 2009.
Interest rates were already at a historic low before this reduction. In the wake of the 2008 financial crisis, the base rate fell dramatically from 5% to 0.5%, where it remained for almost a decade.
November 2017: the MPC restored the base rate to pre-referendum levels in order to combat rising inflation. The Bank linked this decision directly to Brexit, saying ‘the fall in the pound following the Brexit vote’ means that things from abroad cost more, ‘and that means higher prices in the shops’.
August 2018: The MPC raised interest rates from 0.5% to 0.75% – the first rise above 0.5% in almost a decade. This decision was based on the economy’s steady growth, and the accompanying report noted that most referendum-related price hikes appeared to have happened already.
February 2019: In January, inflation fell below the Bank of England’s target of 2%. This led the MPC to keep the base rate at 0.75% in February.
March 2019: Just over a week before the UK’s original EU exit date of Friday 29 March, the MPC voted to keep interest rates at 0.75% once again, citing low unemployment and inflation almost exactly on target at 1.9%. Minutes from the group’s meeting did, however, discuss the negative effect Brexit could have on businesses.
What decision-makers have said about post-Brexit interest rates
With so much uncertainty around what kind of Brexit we’ll see, it’s difficult to predict what the MPC will decide to do when (or if) Brexit actually takes place.
Still, key decision makers have hinted at what form post-Brexit monetary policy could take:
Mark Carney, governor of the Bank of England
In a November 2018 press conference, Carney said that rates could go up or down after Brexit, depending on the circumstances: ‘Since the nature of EU withdrawal is not known at present, and its impact on the balance of demand, supply, and the exchange rate cannot be determined in advance, the monetary policy response will not be automatic and could be in either direction.’
Carney reiterated this line at January’s World Economic Forum in Davos, saying ‘it’s not automatic which way policy would go in the event of a hard Brexit’.
Gertjan Vlieghe, MPC member
Speaking to the Treasury Select Committee late in February, Vlieghe went slightly further than Carney, saying ‘just because [interest rates] could go in either direction, doesn’t mean that each one is equally likely’.
The rate-setter supported Carney’s point that any interest rate decisions will have to be made in real time, after the committee can see what impact Brexit has had.
Despite this, Vlieghe did outline how a likely fall in the pound’s value could lead to higher inflation, which would require the MPC to take action.
The monetary policy committee (MPC)
In February’s inflation report, the MPC, which includes Vlieghe and Carney, said: ‘Whatever form Brexit takes, we will keep inflation low and support the economy.’
As we saw in 2017 and 2018, the MPC can opt to increase the base rate when they want to lower inflation. However, there will be other factors, such as a potential lack of consumer and business confidence, that the Bank will have to contend with after Brexit.
Minutes from March’s MPC meeting said, ‘Brexit uncertainties also continue to weigh on confidence and short-term economic activity, notably business investment.’ The minutes also refer to ‘the possibility of further cliff-edge uncertainties that could have a significant effect on spending’ in the lead up to a delayed Brexit deadline.
However, the minutes note that if the economy develops in line with its projections, the Bank will likely raise rates ‘at a gradual pace and to a limited extent’ in the future.
What economists say about interest rates post-Brexit
Rocio Concha, chief economist at Which?
‘It’s clear that the political uncertainty surrounding Brexit is preventing the Bank of England from raising rates beyond their current level. In the medium term though, the Bank’s intention is still to gradually increase rates closer to their pre-recessionary norms – but only if the UK’s departure from the EU goes smoothly.
In the event of a no-deal Brexit, we expect that the most likely response is for rates to fall in order to stimulate a weakened economy. But, as the Bank says, that is by no means certain. A fall in the value of the pound will undoubtedly lead to higher prices and the Bank may find itself in a difficult position, balancing economic stimulus with tackling inflation.’
Ben Brettell, senior economist at Hargreaves Lansdown
Brettell told Which? Money: ‘The Bank of England has been setting a neutral tone as Brexit approaches. The minutes of recent meetings reiterate that the MPC still sees the need for higher interest rates in the coming years, but a deteriorating global growth outlook and mounting Brexit uncertainty have put paid to any thoughts of tighter policy for now.
Where we go from here is highly uncertain, as we still have little clarity over what Brexit will look like, if and when it happens. An orderly Brexit could see the Bank refocus on wage growth and raise rates later this year. A no-deal scenario would likely see sterling fall 5-10%, causing a spike in inflation, but I’d expect the Bank to look through this and cut rates to support the economy.’
Howard Archer, chief economic adviser to economic forecasting group EY Item Club
Archer told the Press Association: ‘Despite robust employment growth and firm pay, there looks to be zero prospect that the Bank of England is going to act on interest rates until the Brexit situation is resolved and it can see how the economy is being affected.
With Brexit now looking most likely to be delayed until at least 30 June – and very possibly significantly later still – and the economy looking soft overall in the first quarter, we believe that it is ever more likely that the Bank of England will sit tight on interest rates through 2019 – assuming that the UK ultimately leaves the EU with a ‘deal’.’
What can you do to prepare?
If the Bank of England base rate does change after Brexit, the key things that might be affected are your mortgage and your savings.
For savings, a base rate rise could see your account’s interest rate increase, giving you better returns. On the other hand, if the base rate is cut, you might see your interest fall.
Switching to a fixed rate account will secure you against any potential Brexit turmoil, but you’ll miss out on the possible benefits of a base rate rise.
If you’re thinking of switching, you can compare hundreds of savings account at Which? Money Compare to find the best home for your savings.
Variable rate and tracker mortgage customers could face higher repayments if the base rate rises. If you’re worried about this, you could remortgage to a fixed-rate deal in order to secure cheaper repayments for a set period.
However, if the base rate is lower, variable rate borrowers may see their repayments become cheaper. You’ll miss out on this if you’re on a fixed rate.
Seek mortgage advice
Confused about the best option for your circumstances?
You can get personalised, impartial advice on your mortgage by calling Which? Mortgage advisors on 0800 197 8461 or requesting a callback below.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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Editor’s note: This article has been updated with additional commentary.