Interest rates preview: what a rise in the base rate could mean for personal finances

Commenting, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “The Bank of England is once again odds-on to raise interest rates on Thursday. It would be the bank’s 15th hike in a row and mark the highest base rate level since 2007.

“The burning question is: will the next rate rise be the last for a while?

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“The prevailing sentiment among economists is thta Bank of England policymakers are likely to pause upping interest rates further after Thursday’s meeting - but future hikes are not off the table. A lot hinges on inflation. Price rises have slowed in recent months, largely thanks to falls in electricity and gas prices, but underlying pressures are proving more stubborn - which has been seen in the latest wage data in particular. The recent uptick in pump prices means that inflation is expected to have ticked slightly higher in August – such was the case across the pond in the US.

“The Bank of England could be forced to take further action if inflation remains tilted to the upside. If another rate rise is to be avoided, the bank will need to see sustained evidence over the coming months that the 515 basis points rise in interest rates enacted since March 2020 is significantly feeding through to dampen underlying inflationary pressures.

“It may take some time for the full effect of the recent hikes to filter through to the real economy, but the impact personal finances are more forthcoming.”

Mortgages

“It not quite the same old story when it comes to mortgages. Mortgage rates have been falling in recent weeks despite expectations of another rate rise, which is testament to the mortgage price war among lenders at play. This is based on the assumption that the recent cycle of base rate rises may soon be at an end. But mortgage rates remain significantly higher than levels of yesteryear. Those in the market for a new mortgage deal face having to set aside a huge slice of their incomes to meet monthly repayment obligations.

“Another rise in interest rates would add insult to injury for homeowners with a tracker mortgage. This cohort has seen their monthly repayments balloon by hundreds of pounds over a short period and will have to pay on average have to even more if the 25bps uptick in the base rate comes to fruition. With the mortgage eating up a bigger slice of the budget pie, there is less cash left for everyday essentials. It’s a tight squeeze for homeowner, especially when they already grappling with the cost-of-living crisis.

“Mortgage holders with a fixed-rate deal can breathe easy for now as the immediate effects of a rate rise won't knock on their door, for now. However, it's important to keep an eye on the horizon, as once that shelter expires, they’ll likely contend with higher rates when refinancing their mortgage.”

Savings

“Another uptick in the base rate should give savings rates another shot in the arm. Savers might be surprised at the promptness with which the benefit is passed on - thanks to the Financial Conduct Authority’s 14-point action plan to ensure banks and building societies pass on interest rate rises to savers appropriately.

“The recent reprieve in savings rates is a far cry from what we’ve become accustomed to during the extended period of ultra-low interest rates following the financial crash. Those who can afford to put money away for at least five years or more should consider investing for the potential of long-term inflation-beating returns that far outstrip savings rates.

“While past performance is not indicative of future results, saver can take courage in the fact that history shows that even a ‘middle of the pack’ fund is likely to outperform returns from cash savings interest over the long term - so, you don’t need to be an expert stock picker to benefit. The key is to give your money ample time in the market – at least five years - to smooth out the effects stock market ups and downs.”