Bank of England interest rate decision confirmed – what it means for your mortgages, credit cards and savings

THE Bank of England (BoE) has opted to leave interest rates unchanged for the seventh consecutive time.

The central bank’s Monetary Policy Committee today confirmed it has maintained the base rate at a 16-year high of 5.25%.

Decision-makers voted 7 to 2 in favour of keeping it the same.

The Bank’s governor, Andrew Bailey, said policymakers “need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25% for now”.

High street banks and lenders use the BoE base rate to set their own interest rates on mortgages, loans and savings accounts.

The central bank’s decision comes just a day after the latest figures from the Office for National Statistics (ONS) revealed inflation last month hit the BoE’s 2% target.

This is down from 2.3% in the 12 months to April, which marked the lowest level in around three years.

It has also plummeted from a peak of 11.1% in October 2022, which was driven by soaring gas and electricity prices.

Inflation is a measure of how much the prices of everyday goods like food and clothes, and services like train tickets and haircuts, are now compared to a year earlier.

The bank rate previously increased from historic lows of 0.1% in December 2021, which in turn pushed up mortgage rates for millions of households.

But the upturn in the base rate also saw rates on savings accounts pushed up.

The BoE uses the base rate as a lever to control spending, with higher rates intended to dampen demand and spending, which in turn drives down inflation.

The bank rate has been held at 5.25% since September 2023 with inflation gradually slowing to 2% last month.

With inflation slowing, economists are predicting the BoE will soon bring down interest rates and ease pain on mortgage holders.

Below we reveal more about what the rate hold means for your money.

What it means for your money

Mortgages

Usually if rates rise it means that mortgage bills, depending on the type you have, will increase.

Those on a fixed-rate deal tend to be safe until they remortgage.

But other mortgages, such as tracker or standard variable rate (SVR) mortgages, can be impacted straight away.

Homeowners on variable-rate mortgages might not see their repayments go up straight away, but they likely increase shortly after interest rates are hiked.

The exact amount depends on your borrowing and your loan-to-value.

The BoE has today opted to freeze its base rate which means your lender will most likely make no changes to your mortgage rate.

If it does plan on making any changes, it should warn you in advance.

However, the BoE maintaining its base rate keeps pressure on mortgage holders who have been dealing with high rates for months.

Financial information website Moneyfactscompare.co.uk also said the mortgage market remains volatile despite consecutive base rate freezes.

It said the average two-year fixed mortgage rate on the market went up from 5.91% at the start of May to 5.93% at the start of this month, having fallen from 6.04% at the start of December 2023.

Meanwhile, the average five-year fixed-rate mortgage on the market edged up from 5.48% to 5.50% between the start of May and the start of June, having dropped from 5.65% at the start of December.

Rachel Springall, finance expert at Moneyfactscompare.com, said: “The rising cost of mortgages may cause deep concern for borrowers about to come off a fixed-rate deal and needing to refinance.

“Affordability is a pressing point for both homeowners looking to refinance and new buyers, so those struggling to see how they can afford mortgage repayments will no doubt be desperate for interest rates to come down.”

Credit card and loan rates

If the base rate is hiked, the cost of borrowing through loans, credit cards and overdrafts can go up.

However, certain loans, such as personal loans or car financing, usually stay the same, as you have already agreed on a rate.

But you may be charged a higher rate on a future loan, and lenders may increase the rate on credit cards and overdrafts.

Like with mortgages, they should let you know before making any incremental changes.

With rates held, any rates you are paying on credit cards and loans are unlikely to change for now though.

Savings rates

Savers are the main group to have benefited after the consecutive rate rises.

This is because banks tend to battle it out to offer market-leading rates.

That said, banks are usually much slower to pass on higher rates to savers.

Of course, because the base rate has not changed today, banks will likely keep their rates the same too.

Anyone currently getting a low rate on easy-access savings could find it’s worth looking around for a better rate and moving their money.

Meanwhile, with inflation back at 2%, now is a good time to add any spare money you have into a savings account.

Ed Monk, associate director for personal investing at Fidelity International, said: “For savers, now represents a rare opportunity to achieve returns on their money which beat inflation by a clear margin.

“It should be remembered also that risk-assets such as shares can also benefit during such periods and have a history of generating inflation-beating returns that outpace cash.”

Pensions

The BoE’s base rate also impacts pensioners looking to buy an annuity.

A pension annuity converts your pension pot into a guaranteed regular income for the rest of your life.

But because annuity rates are linked to the cost of Government borrowing, any rise or fall in the BoE’s base rate can have an impact on the rate you receive.

The income you receive can be locked in on the day you purchase your annuity, so current annuity rates can make a big difference to your long-term financial security.

But with interest rates unchanged, pensioners will still be able to secure favourable rates.

When will rates fall?

Experts are predicting the base rate won’t be cut until August.

But the chances of it falling in two months’ time should be strengthened by the fact inflation slowed to 2% in May.

Nicholas Mendes, broker at John Charcol, said: “Financial markets do not expect a rate cut from the Bank of England in the near term, especially given the anticipated neutral stance during an election period.

“However, the latest (inflation) figures could strengthen the case for a potential rate cut in early August.”

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