The Bank of England has opted to maintain its base interest rate at 4% after concluding its final meeting before the Budget announcement. This decision influences various financial products like mortgages, loans, and savings rates. The direction of interest rates impacts borrowing costs, with variable and fixed-rate borrowers experiencing changes accordingly.
Currently, interest rates are at their lowest point in over two years, gradually decreasing from a peak of 5.25%. The Monetary Policy Committee (MPC) of the Bank of England, with a split decision, agreed to retain the base rate, with five members supporting the status quo and four suggesting a reduction to 3.75%.
This decision precedes the upcoming Budget on November 26 and aligns with September’s inflation rate staying at 3.8%. Despite inflation remaining high, the Bank of England anticipates a decline to the target rate of 2% by 2027. Governor Andrew Bailey affirmed the gradual descent of interest rates, emphasizing the importance of ensuring inflation aligns with the target before further rate adjustments.
Interest rates serve as a tool to manage inflation by influencing consumer spending through borrowing costs. As interest rates increase, spending typically decreases, moderating demand and subsequently curbing price hikes. Inflation, which peaked at 11.1% in October 2022, has driven the adjustment of interest rates.
Additionally, the Bank of England projects the UK unemployment rate to peak at 5.1% in the second quarter of 2026, slightly up from 5%. Economic growth forecasts have been adjusted, with an increase to 1.5% for 2025 and a maintained outlook for next year, alongside a slight improvement to 1.6% in 2027.
For mortgage holders, the type of mortgage determines the impact of base rate changes. Tracker mortgages mirror the base rate movement, while standard variable rate (SVR) mortgages rely on lender decisions. Fixed-rate mortgages remain unaffected by base rate adjustments until the agreed term ends.
In the realm of credit cards, rates tied to the base rate may fluctuate based on updates, although not all cards are linked to this rate. Personal loans and car financing typically feature fixed rates, preserving repayment terms throughout the agreement. New agreements could be affected by base rate modifications, prompting borrowers to explore competitive options.
Savings rates, influenced by base rate adjustments, can vary for variable accounts but remain stable for fixed-rate accounts. Notable deals offering rates exceeding inflation are available, catering to different saving preferences. Monitoring market trends and considering various account types can help individuals maximize their savings potential.