THE Bank of England has surprised by NOT increasing interest rates today, despite a rise being widely expected.
The base rate of interest will stay at its record low of 0.1 per cent for at least another month.
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It was thought the Bank would hike rates today in a bid to get inflation under control as Brits struggle to cope with a cost of living crisis.
Interest rates were slashed to a record low in March 2020 in a bid to shore up the economy amid the Covid pandemic.
The last time rates were increased was in August 2018.
There had been hints of an increase in recent weeks, but today the Monetary Policy Committee voted to keep them steady.
The committee voted 7 to 2 in favour of maintaining rates at their current level.
The Bank said the UK economy had grown in the third quarter of the year, albeit at a slower pace than expected.
It said based on projections, interest rates were likely to reach “around 1 per cent by the end of 2022”.
Today’s decision will be a surprise to many, after several hints of a rate rise in recent weeks.
Rachel Winter, associate investment director at Killik & Co, said the decision would not be welcomed by those who are becoming increasingly concerned about inflation.
She said: “Although borrowers will be relieved by today’s decision, many people will be concerned about the impact of rising inflation on their finances.”
The next decision on interest rates will be December 16, so households could be in for a nasty shock if they’re hiked just before Christmas.
In the Autumn Budget, Chancellor Rishi Sunak said he had recently written to the Bank to remind it of its remit to keep inflation at 2 per cent.
Currently, inflation is tracking at 3.1 per cent – its highest level since March 2012.
Typically a rate rise can help reduce inflation because it stops people spending and borrowing as much.
Also, a number of banks have started increased their mortgages rates in anticipation of a rise.
Here we look at what a rate rise, when it does come, could mean for your finances.
Why are interest rates so low?
The Bank of England is in charge of setting interest rates.
It sets them based on what is best for the UK economy and what will help it meet its inflation target of 2 per cent.
Interest rates were slashed to 0.1 per cent in March 2020 in response to the outbreak of the Covid pandemic.
It was hoped that cutting rates would help shore up the economy, allowing banks to lend more money to support individuals and businesses across the country.
But interest rates have been low since the financial crisis in 2008.
Rates had hit 5.75 per cent in July 2007 but by March 2009 the Bank of England cut base rate to an unprecedented 0.5 per cent and it would be eight years before they would rise again.
Rates had started to edge up slowly in 2017 and 2018, but the onset of the Covid pandemic meant the Bank of England brought in emergency rates yet again.
Why are interest rates set to rise?
The Bank of England faces a delicate balance in keeping borrowing cheap enough to ensure businesses and individual can borrow money if they to, but not so cheap that they borrow excessively, which pushes inflation up.
Inflation rising is a major concern at the moment because it forces up the cost of everything from energy bills to the price of the food shop.
Households are already having to grapple with soaring bills and record high petrol prices.
It is estimated that inflation could add £180 a year to average family food bill.
And could hit families to the tune of £1,800 by the end of the year.
The Bank of England meets every month to decide on interest rates with the next meet set for December 16.
How will an interest rate rise affect me?
Higher mortgage costs will be the biggest impact of a rate rise for many families.
If you are on a tracker mortgage or standard variable rate (SVR) you will feel the effect almost immediately, as lenders are quick to pass on any increase.
Some 2.2 million Brits are on a variable rate mortgage adn 850,000 households are on a tracker mortgage.
That means 3 million people will see their monthly repayments rise when there is a rate hike.
The average UK homeowner has £131,000 of mortgage debt. If rates went up to 0.25 per cent, that would add £120 a year onto repayments, according to AJ Bell.
If you had a £400,000 mortgage, it would add £360 a year to your repayments.
Overdraft rates on your bank account may also creep up when base rate rises, but experts say it won’t happen overnight.
Shifting your debt onto a 0% balance transfer card is a great way to avoid interest and pay off what you owe more quickly.
If your credit card provider raises its rates, you can reject it and close the account. You should be given 60 days to pay off what you owe.
But rate rises aren’t all bad news, they also mean that savers might be able to get a better deal.
What can I do to prepare my finances?
It’s important to keep a rate rise in context – interest rates are still incredibly low.
Before the financial crisis in 2007, for example, interest rates were 5.75 per cent.
And older generations may remember the 90s, when rates were a whopping 14 per cent.
So, while loans and mortgages may not be as cheap as they were, there are still plenty of decent deals still out there.
Homeowners should check their mortgage rate and consider switching to a cheap deal.
Some banks have already started hiking rates even before an official increase.
If 0.5 percentage points is added to mortgage interest it adds about £50 a month to the cost of a £200,000, 25-year mortgage, or around £120 a month extra to a £450,000, 25-year mortgage.
Some providers offer ultra-long deals which give you certainty over your repayments for as long as 40 years.
If you’re thinking of getting a new savings account, it makes sense to wait until rates creep up – particularly if you’re considering a fixed rate account that ties your money in for a certain period.
This is important because high inflation can erode away the value of any savings you have.
Shopping around on your other bills can help save money, even if they’re not directly affected by interest rate rises.
MoneySavingExpert’s Martin Lewis says you can save £500 on your car insurance by switching to a better deal, for example.
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