Bank of England Base Rate increases to 0.50%

By: MoneyFacts

The Bank of England’s decision to increase interest rates from 0.25% to 0.50% marks the first increase to base rate in over 10 years, and is the result of higher inflation and persistent uncertainty surrounding Brexit. What does this mean for the average consumer?

Savings

Charlotte Nelson, Finance Expert at moneyfacts.co.uk, said:

“Today’s rate decision may see some savers jump for joy, as it marks the first positive base rate move in more than 10 years. However, savers may want to hold back on the celebration, since the link between base rate and savings rates seems to be severed.

“Savers have struggled to find a decent return with rates at rock-bottom. For example, the average easy access account stands at 0.39% today, while back in July 2007 (the last time base rate rose) it stood at a whopping 4.05%. Savings rates have finally taken a positive turn over the past year, with challenger banks stepping in to offer savers some sort of return. As a result, the average two-year fixed rate has risen from 1.09% a year ago to 1.44% today.

“Given it’s been such a long time since the market has seen a base rate rise, it is very difficult to tell whether providers will increase their rates straight away or decide to wait and see what the rest of the market does before making their move. Anyone looking for a savings deal now will need to keep on their toes and check the Best Buys to ensure they are still getting the best rate.”

Mortgages

Charlotte Nelson, Finance Expert at moneyfacts.co.uk, said:

“Competition in the mortgage market has remained high and borrowers have experienced some of the lowest rates on record. However, the speculation prior to today’s base rate rise has been causing rates to slowly creep up since September and so today’s announcement may see an end to the lowest of deals.

“Lenders have been keen to attract the attention of borrowers to protect their mortgage book in case of a rate rise, which is one of the main reasons both the cost and availability of deals has improved. Indeed, the number of mortgage deals has now increased to 4,748 from 4,151 in just one year.

“The last time the markets saw a base rate rise, in July 2007, the average two-year fixed rate stood at 6.24%, whereas today the rate is significantly lower, sitting at 2.33%. Over the same period the SVR has fallen from 7.41% to 4.60% today.

“This rate increase will have a significant impact on those currently on their Standard Variable Rate (SVR). Based on the average SVR of 4.60%, today’s rate rise represents an increase of £28.72* to monthly repayments. However, with fixed rate mortgages still low, borrowers will be significantly better off switching deals now before it may be too late.”

*Based on a £200,000 mortgage over a 25-year term on a repayment-only basis.

Pensions

Richard Eagling, Head of Pensions at moneyfacts.co.uk, said:

“The interest rate rise is good news for those on the verge of retirement who may be looking to secure an income through an annuity, as it’s likely to boost gilt yields, which underpin annuity rates. Although gilt yields have started to increase in recent weeks, they remain low on a historic basis and the increases have yet to fully feed through to annuity rates.

"A significant boost in annuity rates is long overdue, with annuity income having fallen every year since 2014. It will be interesting to see whether any rise in annuity income encourages more retirees to consider the merits of an annuity rather than simply opting for drawdown.”

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