Interest rates on hold this month, but are they set to rise soon?
The Monetary Policy Committee (MPC) at the Bank of England has voted unanimously to maintain the Bank Rate at its lowest ever level of 0.1%.
However, the group of economic experts warned that, if the economy moves in line with their expectations, ‘some modest tightening of monetary policy over the forecast period is likely to be necessary’.
That means if the economy continues to bounce back from the pandemic, it’s likely we’ll see a rise in interest rates from the current all-time low.
Interest rates were slashed to their record low level last March to support the British economy.
As we move out of the pandemic that support is still needed, according to Howard Reuben, principal at mortgage broker, HD Consultants. He said: “The Bank of England is aware that there is the potential for a house of cards, or domino effect, if interest rates were to be increased at present, so it’s no surprise they were left at their current level.”
But things are getting better.
In its August Monetary Policy Report, the MPC said that ‘spending by households and businesses has been rising. The Government’s furlough scheme has helped many people stay in their jobs, although the number of people in work is lower than it was before the pandemic’.
It added that it expects the recovery to continue. As that happens and inflation potentially rises, there’ll come a point when the MPC will tighten monetary policy by increasing the Bank Rate.
What will a rise in Bank Rate mean?
Bank Rate is linked to savings and mortgage rates – sometimes directly but usually indirectly.
If the Bank Rate is moving upwards, you can expect to see mortgage rates rise which will affect some borrowers’ monthly repayments.
Those on a fixed rate won’t be affected by these rises until their deal comes to an end.
But borrowers on a variable rate (that can move up or down) – such as a tracker or discounted rate – could see their pay rate and therefore monthly repayments rise. And new mortgage rates would be likely to rise too.
Martijn van der Heijden, CFO at Habito, said: “Despite today’s decision to keep the base rate steady, it’s only a matter of time before we see it rise.
“Borrowers who are on a variable rate should still consider the impact that any base rate rises this year could have on their mortgage. Even if the rate increases by as little as 0.25%, this could see their repayments shoot up by hundreds of pounds a year, so it’s worth looking at all the options.
“With competition between lenders still very high, there are record-low deals of under 1% to be had for two-year fixes, and even some five-year fixes, but we don’t know how long these low rates will last.”