Bank Of England: The Largest Interest Rate Hike In Years

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Bank Of England: The Largest Interest Rate Hike In Years.

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Let’s look at how the Bank of England base rate affects you and your money.

Bank Of England: The Largest Interest Rate Hike In Years

The fight against inflation is on, the Bank of England has raised interest rates by 0.50% to attempt to bring the inflation rate down. The base rate now stands at 1.75%.

The Bank of England also provided a grim outlook on the UK economy, expecting us to fall into recession by the end of the year. 

What Is Inflation?

If I bought something today, then next year it’ll be more expensive.  Inflation increases prices over time.

Currently, the Bank of England is expecting that UK inflation is set to rise to 13% by the end of the year.

This is very high considering the Bank of England target is 2%.

In Troy’s (my cat) language, this translates to how many Dreamies I buy for him.   

Troy wants to eat Dreamies but if there aren’t as many Dreamies available to buy, the price will go up as people will pay more to get Dreamies.  They’re demanding animals.

On the flip side, if I didn’t want to buy as many Dreamies (which is unlikely) the price of Dreamies could go down.

Inflation is on a bigger scale than just one individual, but is dependent on how much people are willing to spend.

A 13% increase in the cost of the things you buy has a huge impact on everyones purchase ability.

Why Is Inflation High?

Unfortunately, the Russia – Ukraine war has pushed prices up significantly.  Energy prices have soared, most costing more than twice what they were before, due to supply being limited and sanctions being placed.  

This has an impact on businesses.  They have had to put their prices up to cover the increased costs to run the business. This then affects the price of the products you buy. 

Why Do Rates Increase When Inflation Is High?

The Bank of England would like us not to buy as much, the less we buy the slower the inflation rate goes up.  They do this by increasing interest rates, which increases the cost of borrowing money, and also increases the interest rate you get on your savings. 

If people are borrowing less and saving more, then they’re less likely to spend as much. The hope is that this would slow the rate of inflation.

Interest rates have been historically low for quite some time. So the rises aren’t something we’re used to.

Credit:Bank of England

You can read the minutes and summary here.

How Does This Affect Loans & Mortgages?

This largely depends on the loan or mortgage contract you have.

Fixed interest loan/mortgage:

You wont see any impact during your product term.  If you’re fixed for another 5 years then you wont see any change to your rate until after.  If your fixed product comes to an end sooner, then you’re likely to see a change sooner.  

Fixed products now are more expensive than they were a year ago.  Which means any new fixed product you take out will likely be more expensive than your existing.

Variable & Tracker loan/mortgages:

If your interest rate varies then this change is likely to impact you immediately.


If your interest rate currently is 3% on a 25 year term, and your mortgage balance is £200,000 then your current monthly payment will be £946.14 per month.

As the base rate increased by 0.50% then your monthly payment will increase by £52.29 per month, £998.43 in total per month.

It’s important to understand how this change could impact you. 

You can use the Straightforward calculator to check.

Are There Any Positives?

Hopefully the increase in interest rates will help to curb inflation. 

One positive is that it could help to solve the inflation issue. The sooner this happens the better for everyone. 

However, I don’t feel it will solve the high inflation rate on its own. Not until the war is over at least.

Hopefully savings rates will increase.

The rate that you get on the money in your savings account should start to creep up. 

However, it won’t increase by enough to stop you feeling the impact of inflation. Rates are likely to still be lower than the inflation rate.  Nonetheless, an increase can help a little!

Annuity rates are also going up:

If you’re coming to retirement and need a guaranteed income for life, then you’re in luck.  Annuity rates are on the rise.

These have been low for a long time now and haven’t been used much in retirement planning.  However, with the increases in the base rate, annuity rates are becoming more attractive.

Will it end?

We’re likely to see further rate rises throughout this year and probably into next year. 3% is a figure that has been banded around a few times. 

We’re likely to have these problems well into 2023 and it could last to 2024 before we start to see a change. 

High prices = lower prices

Something to consider:

As prices rise, people spend less simply because they can’t afford it. If people aren’t buying then price rises will eventually slow or reverse.

So, often the cure for high prices and inflation, is high prices. 

Couple with interest rate rises, the process is amplified to happen quicker. 

If rates are to continue increasing and you’re worried about your mortgage/loan/credit cards, then please speak to a mortgage adviser or financial adviser.  They can discuss whether it may be worth moving to a fixed interest rate product now to avoid any future increases.


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