The Bank of England has held the base rate at 5.25 per cent, after the Monetary Policy Committee (MPC) finally pushed pause on its continuous rate hiking.
The decision comes following 14 consecutive base rate hikes since December 2021 and will likely be met with a degree of relief among borrowers and disappointment among savers.
In recent months, forecasts for where the base rate would eventually peak have fallen from a high of 6.5 per cent to 5.5 per cent.
Today, it stuck at 5.25 per cent, but the Bank of England is not ruling out further rises.
Holding fire: The Bank of England has refrained from hiking the base rate today having previously upped it on 14 consecutive occasions from 0.1% to 5.25%
Swap rates, which banks and building societies use to price their fixed rate mortgages and savings products, have also fallen.
We explain why the Bank of England has raised interest rates and what it means for your mortgage, savings and the wider economy.
Why has the bank paused rate rises?
Today’s base rate decision was a hard one to call. Some were expecting a 0.25 per cent hike and others expected the MPC to hold fire given that the rate of inflation appears to now be falling.
The official consumer prices index measure of inflation (CPI) fell to 6.7 per cent in August, according to the Office for National Statistics.
Although this was below the 7.1 per cent forecast for the month, inflation remains more than three times more than the Bank of England inflation target of 2 per cent.
Over the past 21 months, higher inflation has led the bank to use the only real tool in its arsenal to try and bring it down – raising interest rates.
The theory is that raising the cost of borrowing for individuals and businesses will reduce demand for it, slowing the flow of new money into the economy.
In theory, more expensive mortgages and better savings rates should also encourage people to save more and spend less, further pushing down inflation.
However, with the rate of inflation easing once again in August, this appears to have given the Bank of England enough confidence to finally call halt for the time being.
Mixed fortunes: Rising interest rates over the past two years has seen mortgage rates rise putting pressure on borrowers. However, savings rates have also risen
Victor Trokoudes, founder and chief executive at smart money app Plum says: ‘Yesterday’s inflation reading of 6.7 per cent appears to have been a game-changer.
‘Not only did the headline rate of inflation surprisingly fall, but a significant decrease in core inflation will have reassured the Committee that its rate increases are feeding through the economy.
‘Today’s hold is a confident sign that the plan is working and inflation is closer to being under control.
‘The pause means the current base rate will have more time to move through the economy.
‘The UK economy shrunk in July, according to the latest GDP figures, and there are even deeper concerns about a recession if higher rates stamp out demand.
‘Despite this, it’s likely we’ll see the base rate stay above 5 per cent for a while, as inflation is still more than three times the Bank of England’s target.’
What does this mean for mortgage borrowers?
The higher base rate has created a mortgage crisis for some – especially those who are due to remortgage in the near future.
That’s because home loan rates have risen significantly over a short space of time.
Mortgage borrowers on tracker and variable rates will likely be breathing a sigh of relief today.
Variable rate mortgages include tracker rates, ‘discount’ rates and also standard variable rates. Monthly payments on all these types of loan can go up or down.
Trackers follow the Bank of England’s base rate plus or minus a set percentage, ie base rate plus 0.5 per cent.
Standard variable rates are lenders’ default rates that people tend to move on to if their fixed or other deal period ends and they do not remortgage on to a new deal.
These can be changed by lenders at any time and will usually rise when base rate does, but they can go up by more or less than the Bank of England’s move.
More shock: Roughly 1.6 million people will face a mortgage shock next year when they remortgage as their low rates come to an end despite the base rate pause today
As for fixed rate borrowers, most are protected by the fact that their deal is fixed in for a period of time. For those approaching their remortgage, they may have noticed that mortgage rates have also been falling of late.
The average two-year fixed mortgage rate is now 6.58 per cent, according to Moneyfacts. The average five-year fix is 6.07 per cent.
This is an improvement from two months ago. A succession of base rate rises and disappointing inflation figures saw average two-year fixed mortgage rates reach a high of 6.86 per cent at the end of July, while five-year fixed rates hit 6.37 per cent.
However, it is still up from 5.17 per cent and 5.49 per cent on 1 June. And well up on two years ago, when the average two-year rate was 2.52 per cent and the average five-year rate was 2.75 per cent.
You can check the latest mortgage rates you could apply for, and get expert advice, using the This is Money mortgage service.
Of course, it’s important to also remember these are the average rates across the entire market. The cheapest deals available paint a slightly more positive picture.
It’s possible to get a rate of 5.61 per cent on a two-year fix, and as low as 4.99 per cent when fixing for five years. It is worth speaking to a mortgage broker to find the cheapest deal that you may be eligible for.
Past the peak? Fixed mortgage rates appear to be falling back somewhat after a barrage of rate hikes in recent months
But even if they can bag a below-average rate, those who need to remortgage this year are still likely to face a serious hit to their finances.
The average borrower coming off a two-year fix would see their rate increase from 2.52 per cent to 6.58 per cent, if they fixed for two years again today.
On a £200,000 mortgage over a term of 25 years, this would mean monthly mortgage payments rising from £899 to £1,360 – an increase of £461 a month or £5,532 a year.
A more stable interest rate environment, even if high, can bring some predictability
Karen Noye, mortgage expert at Quilter says: ‘Persistently high rates will pile continuous pressure on those with mortgages and force some to sell up.
‘While these rates can help manage inflation and ensure economic steadiness, they can cause people to spiral into further debt as they fall into arrears.
‘A more stable interest rate environment, even if high, can bring some predictability. For aspiring homeowners, notably first-timers, this can be invaluable.
‘A more stable mortgage rate landscape can help these buyers budget better and not have to deal with unpredictable rate spikes that can disrupt financial plans.’
> How to remortgage your home: A guide to finding the best deal
What next for fixed rate mortgages?
Mortgage borrowers on fixed term deals should focus less about the base rate decision today, and more about where markets are forecasting the base rate to go in the future.
This is because banks tend to pre-empt the base rate hike. They change their fixed mortgage rates on the back of predictions about where the base rate will ultimately go, and how long inflation will last for.
Higher than anticipated inflation figures at the end of May increased the chance of further base rate rises.
In response to heightened base rate expectations, both gilt yields (the rate on UK government borrowing) and swap rates – the money market rates that lenders use to set fixed rate mortgage pricing, increased substantially.
Downwards: Over the past few weeks, mortgages rates have continued to trickle downwards due to competition between lenders and market expectations about interest rates in the future
However, markets then reacted positively to the news that both CPI and core UK inflation fell in June.
Since then, a number of major mortgage lenders have slashed rates, often multiple times.
Five-year swaps are currently at around 4.4 per cent per cent. Before June’s positive inflation reading they were above 5 per cent. Similarly the two-year swap rate is now 5.1 per cent. Prior to June’s inflation reading this was around 6 per cent.
David Hollingworth, associate director at L&C Mortgages says that things look rather more positive than they did only a couple of months ago especially if fixed rates continue to sharpen up
David Hollingworth, associate director of broker, L&C Mortgages says: ‘Beleaguered borrowers will have become used to rising rates, so a hold will feel like a breath of fresh air.
‘More importantly this could signal the end of rising rates and help to improve prospects for the options open to borrowers.
‘The better than expected inflation figures this week will give hope that base rate may have now topped out.
‘The positive movement in inflation could lead markets to feel that the outlook for interest rates is now improved.
‘That could feed through to fixed rate mortgages and help give an added boost to the improvements we have already seen in recent weeks.
‘Overall things look rather more positive than they did only a couple of months ago especially if fixed rates continue to sharpen up. That may help potential buyers that have held off during the recent volatility.
‘It will certainly be welcomed by those looking to remortgage and any improvement in deals will help them to deal with the move from the low rates of recent years.’
What does the base rate holding at 5.25% mean for savers?
The Bank of England’s successive interest rate rises over the last year and a half have, by and large, been good news for savers.
The best savings accounts now offer some of the highest interest rates seen since 2008.
A rise in CPI inflation yesterday may well have triggered a fifteenth consecutive base rate rise.
But with the surprise drop in inflation to 6.7 per cent yesterday from 6.8 per cent, the Bank of England saw it fit to pause the rate hike cycle.
Now, with the base rate hike cycle peaking at 5.25 per cent, savers will be wondering whether it is the end of the savings rate heyday for their nest eggs.
Savings experts had been calling the top of the market in the weeks leading up to the base rate decision, saying that last month’s 0.25 basis points hike to 5.25 per cent would be the last.
And there were signs that the market had reached the top. At the start of this month, Santander launched a blockbuster easy-access account paying a market-leading 5.2 per cent rate, which was pulled early due to soaring demand.
Inflation falling: Many are hoping that falling inflation (the rate at which prices rise) my mean savers will soon start to become richer in real terms
While NS&I boosted its one year fix to 6.2 per cent, a rate which other providers struggled to compete with.
If you haven’t reviewed your savings recently, now is a good time to check your rate and mover to a table topping rate while you still can.
The advice is simple. Don’t be loyal to your bank or savings provider. Be proactive and hunt for the best rates using our independent best buy savings tables.
Rachel Springall, finance expert at Moneyfacts, says: ‘As we have seen over the years, loyalty does not always pay, and not every saver will feel the full benefits on their existing account.
‘However, competition within the live savings market remains high and challenger banks and building societies continue to offer some of the best returns.
‘It is always worth considering the more unfamiliar brands that have the same deposit protections in place as a big high street bank when comparing savings accounts.
‘There is hope that customers of the biggest banking brands will see rate improvements in the months to come, as banks will need to justify their current savings rates.’
Laggards: Many of the High Street banks lag behind smaller providers when it comes to savings rates
Is it downhill from here for savings rates?
The best savings rates have been climbing at speed in recent months, with banks battling it out with each other in order to take the top spot and attract new customers.
In the lead up to the base rate decision, economists had been predicting that the Bank of England’s last base rate hike to 5.25 per cent could be the end of the road for rising interest rates.
Now that this has proven to be the case, experts agree that rates are likely to move downwards.
Andrew Hagger, personal finance expert and founder of MoneyComms says he expects savings rates will slowly start to slip back
Andrew Hagger, a personal finance expert at MoneyComms says: ‘I think that rates will slowly start to slip back, however the intense level of competition means it will be gradual and we’re unlikely to see rates drop like a stone.
‘We are pretty much at the peak now as far as fixed rate savings and Isas are concerned, though we may see a further small uptick in easy-access rates.
‘Competition remains intense in the cash Isa market with many savers using tax-free accounts to mitigate their tax situation after exceeding their Personal Savings Allowance, so I don’t expect to see rates dropping away much in the next couple of months.
Savers might expect to see a few easy-access rates continue to nudge up as these are often priced in reaction to base rate movements, unlike fixed rates which are priced ahead.
But based on today’s decision, the rise of fixed-rate savings has now likely reached its peak.
Which banks offer the best savings rates?
When it comes to choosing an account, it’s always worth keeping some money in an easy-access account to fall back on as and when required.
Most personal finance experts believe that this should cover between three to six months worth of basic living expenses.
The best easy-access deals, without any restrictions, pay north of 4.9 per cent. If you’re getting anything less than this at the moment, then switch to a provider that pays more.
In terms of the best of the best, Paragon is now offering a market-leading easy-access deal paying 5.05 per cent.
Someone putting £10,000 in Paragon’s account could expect to earn £505 of interest over the course of a year, if the variable interest rate remained the same.
> Find the best easy-access savings rates here
Those with extra cash which they won’t immediately need over the next year or two should consider fixed rate savings.
Fixed rates offer the best returns at present. The best one-year deal is offered by NS&I and pays 6.2 per cent.
As the Government’s savings bank, NS&I has the backing of HM Treasury, who guarantee 100 per cent of everything you invest in NS&I. Not just £85,000 as with FSCS protection.
Someone putting £10,000 in NS&Is deal will earn a guaranteed £620 interest over one year.
> Check out the best fixed rate savings deals here
Savers should also consider using a cash Isa to protect the interest they earn from being taxed.
The top one-year fixed term cash Isa is paying 5.85 per cent interest, while the top two-year fix is paying 5.79 per cent.
The equivalent fixed-term bonds are paying even more at 6.2 per cent for one-year and 6.05 for two-years, but tax may need to be paid depending on the amount of interest earned.
> Check out the best cash Isa rates here
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