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What will the Brexit trade deal and coronavirus mean for interest rates?

The Bank of England has kept interest rates low, but they could go lower

What will the Brexit trade deal and coronavirus mean for interest rates?

The Bank of England has held interest rates at the historic low of 0.1% in its latest base rate decision, saying the UK’s economic outlook is ‘unusually uncertain’.

The Monetary Policy Committee (MPC) voted unanimously to keep the base rate, which acts as a guideline for banks and lenders when they set their interest rates, at the level it’s been since March.

Normally the Bank holding rates isn’t surprising, but this comes after speculation that the interest rate would fall to 0% or even into negative figures.

Reports emerged in October that the Bank had written to the chief executives of several firms to ask whether their companies would be ready for a negative base rate, and it’s known that the Bank is actively exploring the option of setting a negative rate.

However, as we’ve seen today, it hasn’t done this yet.

Minutes’ from the MPC’s December meeting note that the country’s economic outlook is ‘unusually uncertain’, and that future decisions will depend on the outcome of Brexit, how the pandemic develops, and how people, companies and policy makers respond to these events.

Here, Which? looks at the impact that coronavirus and Brexit could have on interest rates and what that means for you.

Why the base rate matters

The Bank of England base rate influences how much banks and other lenders charge customers to borrow money, and the amount of interest they pay on savings.

A lower base rate generally means lower interest on savings, so your pot will grow a little more slowly. But mortgage and loan interest rates are likely to drop, too, making it cheaper to borrow.

Higher base rates usually mean that savings interest grows faster, but mortgages and loans become more expensive.

The table below has the base rate and the average standard variable mortgage rate since October 2016, for comparison.

The Bank of England changes the rate to help keep inflation at around 2%, which is considered a sustainable level, raising and lowering it in line with current events. It kept the rate the same for years after the 2008 crash, but Brexit – and now coronavirus – have forced the Bank to make quick and dramatic changes.

Will interest rates turn negative?

The Bank of England said in June it was considering introducing a negative interest rate to help boost the UK economy in the future. This was reaffirmed in its minutes from its meeting on 17 September, and the letter sent out to some chief executives was the next step in its assessment.

Firms’ responses could therefore have an impact on whether or not these changes are introduced.

If a negative base rate were to be introduced, it would be the first time the rate had dropped below zero in the country’s history, and it would have wide-ranging effects. Potentially, it could even mean you’d have to pay your bank to hold onto your cash.

Savings rates, already in decline, have fallen steeply since the base rate was reduced to 0.1% in March. Negative interest rates could make high-return savings accounts even harder to come by.

On the flipside, borrowing could become cheaper, which would be good news for people with mortgages.

Coronavirus crashes interest rates to record low

The pandemic’s spread in March caused the Bank of England to make two major cuts to its base rate in rapid succession.

On 11 March it cut the rate from 0.75% to 0.25% – a record low at the time. Just eight days later, the Bank slashed it even further to 0.1%, where it remains today.

Decisions about the base rate are usually made during scheduled MPC meetings, like the one that took place before today’s announcement. But March’s two cuts were made at emergency meetings called in coronavirus’ wake. These were the first emergency MPC meetings since the 2008 financial crisis.

The MPC changes the base rate with the intention that this will help ‘sustain growth and employment’. However, coronavirus continues to hamper both.

Thousands of jobs have already been lost and mass unemployment is expected when the furlough scheme ends.

The UK officially entered a recession in August, with Gross Domestic Product (GDP) plummeting to its lowest level on record.

This alone would be enough uncertainty for the Bank of England to deal with. But as the minutes of recent MPC meetings note, Brexit is also a concern.

How Brexit influenced interest rates

The Bank’s two emergency cuts in March were unrelated to Brexit. At that time – and indeed right up until August – the MPC was working on the assumption of a smooth transition to a free trade deal with the EU in January 2021. However, with weeks to go until the 1 January and no trade deal agreed, this may have been optimistic.

Exchanges between UK and EU negotiators are going right down to the wire, but the BBC reports that Prime Minister Boris Johnsons’s spokesperson said no deal is still the ‘most likely outcome’.

Since then, the rate was actually raised to 0.75%, where it stayed until March, although policymakers were still watching Brexit developments carefully.

With EU trade talks still underway and more to come with other countries, Brexit could still have an impact on the economy.

This article was originally published on 17 September 2020 when the Bank of England announced it was holding the base rate at 0.1% until the next MPC meeting. It was last updated on 17 December 2020 as the Bank announced again that it would hold the rate. Additional reporting by Danielle Richardson.


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