What Is the Impact Of BoE’s Interest Rate Hike?

In a surprising turn of events, the Bank of England has announced a bold decision to raise its base rate by 0.5 percentage points. This propels the Bank’s interest rate from 4.5% to a significant 5%. This move, the latest in a series of similar adjustments, promises to create waves across the economy, affecting households, savers, and businesses alike.

What’s behind this decision, and what does it mean for the average Briton? And most importantly, what are experts’ views on it?

Understanding The Rate Rise

Central banks like the Bank of England modify their base rates as a strategy to manage inflation – the rate at which the prices of goods and services are increasing. With inflation currently riding high in the UK, the Bank has opted to hike interest rates in an attempt to quell this rise.

Higher interest rates theoretically encourage saving, thanks to higher returns. Conversely, it should discourage borrowing, as the cost of loans – including mortgages – become steeper. This decrease in borrowing can lead to less spending, which in turn can cool the economy and bring inflation under control.

However, while this might work in theory, the reality can be much harsher, especially for those already under financial strain.

What This Means For Households

For anyone with a variable-rate mortgage, monthly payments are set to increase, with every 0.1% increase in the Bank Rate adding approximately £10 to the monthly cost of a £100,000 mortgage. Savers might see an increase in their returns, although these typically lag behind and are often less than the rate of inflation, leading to a reduction in spending power.


What Experts Have To Say

Several financial experts have begun weighing in on the potential impact of this announcement.

Andy Mielczarek, Founder and CEO of SmartSave, a Chetwood Financial company, said: “Better savings rates are the silver lining to come from persistently high inflation. As a result, customers loyal to high street banks are potentially paying a high price for their loyalty by missing out on better rates.

“With the average easy-access rate sitting at 2.3%, there is often a big gulf between average rates and the top deals that can be secured by looking beyond the high street and also considering fixed-term products. Today’s latest hike, already priced into some savings products, only makes it more important that people consider all their options.”

Lily Megson, Policy Director at My Pension Expert, said: “When the Chancellor is advocating for more interest rate pain as a necessarily evil to bring about a recession and, in turn, curb inflation, you get a clear indication of the worry state of the UK economy. This will do nothing to help Britons’ financial confidence – particularly those approaching retirement.

“The priority for many pension planners is to protect the value of their hard-saved money. Some may opt for securing a fixed income via an annuity, which are now offering much improved rates, while others may move some or all their money into higher risk investments in an attempt to “recession proof” their retirement finances. However, if major changes are made without the right help, savers risk making ill-informed decisions.

“While the government has made it clear that it will not intervene where interest rates are concerned, it could do more to ensure consumers don’t feel pressured or panicked into making ill-informed decisions. Making sure pension planners have access to affordable independent financial advice would be a strong start. Such support would be a financial lifeline to many, helping savers understand their current situation, and the steps needed to achieve the retirement they want even as rates rise and inflation persists.”

Mohsin Rashid, CEO of ZIPZERO, said: “After a year of being worn down by persistently high inflation, it seems that soaring interest rates could now deliver the knock-out blow to millions of Britons, with mortgage holders facing unaffordable repayments and even potential repossessions. Make no mistake: if interest rate hikes continue on this trajectory, defaults are set to soar.

“Throughout the cost-of-living crisis, households have found creative money-saving solutions everywhere, from food shopping, and energy usage, to monetising their own data. But households cannot fight this war on every front. The government must now conjure the same ingenuity and find creative solutions to support struggling households who are reading today’s news in the fear that their finances are going to be stretched beyond breaking point.”

Chieu Cao, CEO of Mintago, said: “It already felt like we were on the edge of a cliff when it comes to Britons’ financial wellbeing, but yesterday’s inflation and today’s base rate hike will push many people over the edge and onto the rocks below.

“Businesses need to be prepared – as much as their costs are rising as well, it’s their staff who are going to feel the harshest effects of high interest rates and the cost-of-living crisis. That’s why employees require considered, robust wellbeing support; support that is regrettably lacking among many employers at present.

“In truth, too many businesses still see financial wellbeing support as a ‘nice to have’, but it’s a necessity right now. Employers must recognise the detrimental impact that financial stress can have on employees’ productivity, mental health, and overall wellbeing, and provide them with the tools they need to manage their finances as effectively as possible.”