The Bank of England is expected to lift its benchmark interest rate to 4% from 3.75% when it announces its decision on Thursday. That would be the first rise in more than three years. Inflation is running at 3.5% and energy costs are still climbing.
A £5,000-a-year Gap for Mortgage Borrowers
What homeowners now pay shows the size of the change. Broker L&C indicates that the average rates from the 10 biggest lenders mean some borrowers would pay almost £5,000 more each year in repayments on a £200,000 mortgage over 25 years. That compares with those who secured a remortgage deal in 2021, when the average five-year fixed remortgage rate among those lenders was 1.30%.
As of 4 November, the average five-year fixed rate stood at 5.99% and the two-year at 5.96%, according to Moneyfacts. Anyone rolling off a five-year deal faces a much bigger bill.
The rate rise itself would hit some borrowers immediately. The 510,000 tracker mortgage-holders would feel an immediate impact: UK Finance calculations show that a 0.25 percentage point rise translates into a £31 increase in monthly repayments for someone with a typical tracker loan. The 470,000 mortgage-holders on variable deals would need to wait for their lender’s reaction. Typically a 0.25 percentage point rise means a £14 increase per month. Those on fixed deals see no immediate change — lenders have already priced the expected rise into new quotes.
The Bank Moves as Inflation Hits 3.5%
Pressure on the Monetary Policy Committee has grown since official figures showed CPI inflation rose to 3.5% in September, the highest level in 11 months, and well above the Bank’s 2% target. The Iran war’s continuing effect, mainly on energy and fuel costs, has fed into the inflation rate, with soaring petrol and diesel prices acting as a key driver.
Ofgem’s energy price cap went up by 3.6% for a typical household on 1 October. It is predicted to rise by another 22% in January. Inflation is anticipated to climb further this winter.
Analysts Look Beyond Thursday’s Rise
Chris Cheverall, head of UK at trading platform CMC Markets, framed the stakes beyond the quarter-point itself: The decision is increasingly less about whether rates reach 4% and more about what follows after that.
He added: A quarter-point rise is already widely expected, but the Bank now has to balance inflation that is still too high against an economy where the growth outlook has weakened sharply.
Weaker Growth Outlook Clouds Forecasts
The MPC’s updated forecasts are likely to show slightly stronger growth this year. Weaker growth further out will overshadow that as rising inflation and higher energy costs bite, keeping further rate rises on the table, Thiru said.
The economy unexpectedly grew by 0.1% in August. That suggests resilience despite pressure on consumer spending and wider volatility because of the Iran war. The committee will also weigh the UK’s unemployment rate falling to 4.7% in the three months to August — its lowest level in more than a year.
Markets Eye 12:00 GMT Decision
The announcement comes on Thursday. Close attention will be paid to any hints from the MPC on the future direction of rates. For borrowers weighing a tracker against a fixed deal, the choice hinges on confidence about future rises: The right choice ultimately depends on borrowers being confident they can stomach future rises,
said Rachel Springall from Moneyfacts. The devil is in the detail.
Savers could see the interest rates offered to them improve in light of any rise, and the cost of some other new loans could also be influenced by the Bank rate. What follows after 4% is not yet known.
Earlier coverage: Bank of England examines raising mortgage loan-to-income threshold
