Bank of England base rate increased to 0.75%

The Bank of England has raised the base rate of interest to 0.75%, the highest level since March 2009.

The base rate is used by financial institutions to determine the amount of interest charged to borrowers and awarded to savers.

The Monetary Policy Committee (MPC), which includes the Governor of the Bank of England Mark Carney, voted unanimously to increase the rate from 0.5% on 2 August. It is only the second time the base rate has risen in a decade.

History of the base rate

The base rate fell to an all-time low of 0.5% during the financial crisis in 2009 — a fairly drastic change from the rates of 5-5.5% seen just the previous year.

Rates have remained fairly stable since then, only dropping briefly to 0.25% in 2016, followed by an increase to 0.5% in November 2017.

While there’s no guarantee where rates might go from here, it’s widely expected that they will gradually rise to around 2.25%, half of the “historical average”, in order to drive inflation closer to the government’s target of 2%.

The graph below shows how the rate has changed since 2000, and how mortgage rates have mirrored this:

What does the rate rise mean for your finances?

The base rate rise is likely to affect the mortgage rates offered by lenders.

Tashema Jackson, money expert at uSwitch, said: “First affected by this rate hike will be the third of mortgage holders who are currently on their bank’s standard variable rate, as well as those on tracker rate mortgages – with the increase almost certainly passed on immediately.

Inevitably, fixed term mortgage deals will also see a jump in interest rates as the banks adjust their offers in response.”

You can find out how the rate rise could affect your mortgage repayments with our rate rise calculator:

While the rate rise could mean higher repayments for mortgage holders, it’s better news for savers. The increase in interest rates should lead to better returns from cash savings accounts, if banks pass on the rate rise to their customers.

The end of cheap credit?

The rate rise is also likely to affect other consumer credit products, with the possibility of lower introductory periods on credit cards and higher fees on overdrafts.

Commenting on the potential impact of the rate rise, Jackson said: “This increase in the Bank of England’s base rate will see the cost of borrowing rise for consumers as the era of cheap credit comes to an end. With millions of hardworking families reliant on debt to simply get through the month, this and its likely knock-on effect will serve as a real wake up call.”

“If you are on a standard variable rate mortgage, or looking for a long balance transfer credit card, take a good look at your finances and consider if you need to act now. There are still a number of good deals out there which, if they match your circumstances, may help you manage your debt more easily.

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