INTEREST-ING
Bank of England announces key interest rate decision – see how your mortgage, credit card and savings are affected
Plus, we explain when rates could be cut
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THE Bank of England has left interest rates unchanged for the sixth consecutive time.
Decision-makers on the Bank's Monetary Policy Committee (MPC) have left the base rate at a 16-year high of 5.25% today.
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High street banks and lenders use the Bank of England (BoE) base rate to set the interest rates it offers customers on mortgages, loans and savings.
At its latest meeting, the MPC voted 7–2 to maintain the Bank rate at 5.25%.
Andrew Bailey, BoE governor, said: "We've had encouraging news on inflation and we think it will fall close to our 2% target in the next couple of months.
"We need to see more evidence that inflation will stay low before we can cut interest rates.
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"I'm optimistic that things are moving in the right direction."
The MPC indicated it is still looking for more progress on factors including services inflation and wage growth, which have remained high.
The CPI measure of inflation fell to 3.2% in March - down from 3.4% in February and the lowest since September 2021.
However, the BoE now expects inflation to fall below its 2% target by June and could eventually drop to 1.5% in 2026.
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Inflation is a measure of how much the prices of everyday goods like food and clothes, and services like train tickets and haircuts, are now compared to a year earlier.
The bank rate previously increased from historic lows of 0.1% in December 2021, pushing up mortgage rates for millions of households - but giving savers better returns.
What is inflation and what does it mean for me?
Higher rates are meant to dampen demand and spending to tackle high inflation.
Since September 2023, the bank rate has been held at 5.25% as inflation has slowed.
However, the easing cost of living crisis has left experts and homeowners anticipating that the Bank of England will cut rates.
Analysts and investors now believe that rate cuts have the potential to arrive as early as June.
This revised forecast comes just weeks after it was suggested that the BoE would begin to cut rates in August.
When could interest rates fall?
ANALYSIS by Ashley Armstrong, The Sun's Business Editor.
The Bank of England has kept interest rates at 5.25% for the sixth time in a row because it wants more confidence that inflation is coming down and will stay down.
However, there are encouraging signs that rates could be lowered - maybe as soon as next month.
The Bank is softening its stance on keeping rates high.
Zero of its members voted to raise rates, and two of its nine-member rate-setting committee voted in favour of cutting interest rates.
This is the highest number since the Bank started raising them two years ago to tame inflation.
Governor Andrew Bailey even said he was "optimistic that things are moving in the right direction".
The Bank will have two sets of official inflation figures to consider before it decides on rates again on June 20.
And if that data shows the rate of price rises has eased from 3.2% to its golden target of 2%, the Bank will likely make its first rate cut.
The drop in inflation is largely driven by falling energy prices since the crisis caused by Russia’s invasion of Ukraine.
Some economists still reckon the Bank rate could fall to 4.25% by the end of the year.
The Bank has hesitated this time before cutting rates this time largely because wages are still rising at 6%. And it still thinks inflation will tick up again next year to 2.7%, suggesting there are still risks.
Higher wages are feeding into inflation because companies are passing on increased staff costs to consumers. This is most noticeable in pubs, restaurants and cafes with the hospitality industry responsible for about 80% of inflation.
Recent jobs reports also show that while employment vacancies are rising, and unemployment figures have inched higher, wages have kept increasing.
While most Brits would cheer higher wages and low unemployment, the Bank actually wants the opposite because that would mean its higher interest rates have cooled hot inflation.
Critics argue though that the Bank risks overdoing it and squeezing the economy too hard by keeping rates high even when there are signs inflation is coming down.
Business investment has shrunk because many companies can’t afford to take on extra debt with high interest rates and house purchases have also slumped because of expensive mortgage rates.
Below, we've explained exactly what another hold on rates means for your finances.
What does it mean for my mortgage?
When interest rates hold steady, your current mortgage rate typically remains unchanged.
Fixed-rate deals guarantee a set rate for a specific period, shielding borrowers from fluctuations.
Tracker mortgages, tied directly to the BoE base rate, can rise and fall anytime but are unlikely to do so now.
Many households opt for these deals, hoping for future rate drops.
Standard variable rate (SVR) mortgages also stay put when the Bank of England rate remains unchanged.
However, SVRs often have higher rates, kicking in automatically after a fixed-rate deal ends.
Lenders can adjust your rate anytime, but they must notify you beforehand.
While today's decision doesn't directly impact mortgage rates, the Bank of England's stance still influences costs.
Experts have argued that the BoE's growing reluctance to cut rates still prompts mortgage adjustments.
Edward Newman, chief executive of financial comparison site Finance.co.uk, said: "Not only is the BoE's inaction delaying cheaper deals, but it’s also contributing to higher rates.
"Lenders have been increasing their rates across the board in recent weeks, partly because fewer and later cuts are now expected."
If your mortgage rate changes, there are a number of things you can do to make sure you're getting the best deal.
Karen Noye, mortgage expert at Quilter, adds: "There are options you can explore that can help lower your mortgage rate further, such as putting down a larger deposit to decrease the loan to value level, which can often help you secure better rates.
"The length of time you fix your mortgage deal for can also impact the rate you pay."
How to get the best deal on your mortgage
IF you're looking for a traditional type of mortgage, getting the best rates depends entirely on what's available at any given time.
There are several ways to land the best deal.
Usually the larger the deposit you have the lower the rate you can get.
If you're remortgaging and your loan-to-value ratio (LTV) has changed, you'll get access to better rates than before.
Your LTV will go down if your outstanding mortgage is lower and/or your home's value is higher.
A change to your credit score or a better salary could also help you access better rates.
And if you're nearing the end of a fixed deal soon it's worth looking for new deals now.
You can lock in current deals sometimes up to six months before your current deal ends.
Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.
But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal - but compare the costs first.
To find the best deal use a mortgage comparison tool to see what's available.
You can also go to a mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
You'll also need to factor in fees for the mortgage, though some have no fees at all.
You can add the fee - sometimes more than £1,000 - to the cost of the mortgage, but be aware that means you'll pay interest on it and so will cost more in the long term.
You can use a mortgage calculator to see how much you could borrow.
Remember you'll have to pass the lender's strict eligibility criteria too, which will include affordability checks and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month's payslips, passports and bank statements.
What does it mean for credit card and loan rates?
Credit card and loan rates aren't directly linked to the Bank of England base rate, so today's decision is unlikely to affect them.
However, lenders retain the right to adjust rates, with the obligation to provide prior notice.
Your existing loans, such as a personal loan or car financing, will usually stay the same anyway, as you've already agreed on the rate.
It's wise to regularly review rates to ensure you're getting the most advantageous deal.
Last week, The Sun revealed that millions of credit card customers face rising fees as lenders continue to hike interest charges.
Some providers have raised the interest charged on their cards by 11 percentage points in the last decade.
We've previously explained how you can shift your credit card debt and cut your borrowing costs.
How to cut the cost of your debt
IF you're in large amounts of debt it can be really worrying. Here are some tips from Citizens Advice on how you can take action.
Check your bank balance on a regular basis - knowing your spending patterns is the first step to managing your money
Work out your budget - by writing down your income and taking away your essential bills such as food and transport
If you have money left over, plan in advance what else you’ll spend or save. If you don’t, look at ways to cut your costs
Pay off more than the minimum - If you’ve got credit card debts aim to pay off more than the minimum amount on your credit card each month to bring down your bill quicker
Pay your most expensive credit card sooner - If you have more than one credit card and can’t pay them off in full each month, prioritise the most expensive card (the one with the highest interest rate)
Prioritise your debts - If you’ve got several debts and you can’t afford to pay them all it’s important to prioritise them
Your rent, mortgage, council tax and energy bills should be paid first because the consequences can be more serious if you don't pay
Get advice - If you’re struggling to pay your debts month after month it’s important you get advice as soon as possible, before they build up even further
Groups like Citizens Advice and National Debtline can help you prioritise and negotiate with your creditors to offer you more affordable repayment plans
What does it mean for my savings?
The Bank of England's interest rate also influences savers' earnings.
Savers have been rewarded in recent years as banks continue to battle it out by offering market-leading savings rates - in some cases up to 6%.
However, with unchanged rates, banks will continue to use this to their advantage.
Instead of fighting to offer the best deal, banks are more likely to maintain rates at their current levels - and in some isolated cases make small cuts.
There are still a number of good deals on the market, and experts have warned those with low paying accounts to shop around.
This should act as a warning for those with enough money to save.
Now is the perfect time to explore better deals and ensure that you are earning the maximum amount of interest available.
Victor Trokoudes, founder and CEO at smart money app Plum said: "The opportunities for savings continue as rates remain high, even without having to lock away the money in a fixed rate account.
"Cash ISA rates are particularly high and make these a really attractive and tax-efficient option for savings.
"Alternative saving products such as money market funds are also gaining ground as people look to maximise on high rates while they are here."
How can I find the best savings rates?
IF you are trying to find the best savings rate there are websites you can use that can show you the best rates available.
Doing some research on price comparison sites, including MoneyFactsCompare and Compare the Market, will quickly show you what's out there.
These websites let you tailor your searches to an account type that suits you.
Before you open a new account, it is important to understand which account will work for your needs.
A fixed-rate or fixed bond savings account offers some of the highest interest rates but comes at the cost of being unable to withdraw your cash within the agreed term.
This means that your money is locked in, so even if interest rates change you cannot move your money and switch to a better account.
Some providers give the option to withdraw, but it comes with a hefty fee.
Shorter-term fixed savings account or notice accounts work in the same way.
An easy-access account does what it says on the tin and usually allows unlimited cash withdrawals.
These accounts tend to come with lower returns but are a good option if you want the freedom to move your money without being charged a penalty fee.
Lastly, there is a regular saver account. These accounts generate decent returns, but only if you pay a set amount each month.
Separately, ISAs offer tax incentives and allow those with over £20,000 in savings to earn interest without paying tax.
What does it mean for retirement?
The Bank of England's base rate also impacts pensioners looking to buy an annuity.
Annuity rates are linked to the cost of government borrowing and pay a guaranteed income for life.
The income you receive can be locked in on the day you purchase your annuity, so current annuity rates can make a big difference to your long-term financial security.
With interest rates unchanged, pensioners can still secure favorable rates.
Lily Megson, policy director at My Pension Expert, said: "The hold comes hand-in-hand with the ongoing burden of sticky inflation and the weighty cost of borrowing.
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"For some savvy savers, there is a silver lining to continued higher rates – namely, strong returns on fixed-term products like annuities."
What is the base rate and how does it affect the economy?
NINE members of the Bank of England's Monetary Policy Committee meet eight times each year to set the base rate.
Any change to the Bank's rate can have wide-reaching consequences as it directly influences both:
- The cost that lenders charge people to borrow money
- The amount of savings interest banks pay out to customers.
When the Bank of England lowers interest rates, consumers tend to increase spending.
This can directly affect the country's GDP and help steer the economy into growth and out of a recession.
In this scenario, the cost of borrowing is usually cheap, and the biggest winners here are first-time buyers and homeowners with mortgages.
But those with savings tend to lose out.
However, when more credit is available to consumers, demand can increase, and prices tend to rise.
And if the inflation rate rises substantially - the Bank of England might increase interest rates to bring prices back down.
When the cost of borrowing rises - consumers and businesses have less money to spend, and in theory, as demand for goods and services falls, so should prices.
The Bank of England is tasked with keeping inflation at 2%, and hiking interest rates is a way of trying to reach this target.
In this scenario, the losers are those with debt.
First-time buyers will lose out to cheaper mortgage rates, and those on tracker or standard variable rate mortgages are usually impacted by hikes to the base rate immediately.
Those on a fixed-rate deal tend to be safe if they fixed when interest rates were lower - but their bills could drastically increase when it's time to remortgage.
The cost of borrowing through loans, credit cards and overdrafts also increases when the base rate rises.
However, the winners in this scenario are those with money to save.
Banks tend to battle it out by offering market-leading saving rates when the base rate is high.