Bank of England interest rate decision – what it means for your money and mortgage

The Middle East conflict, and its economic fall-out, is front of mind for Bank of England rate-setters

Millions of borrowers – and savers – are nervously awaiting today’s Bank of England ’s interest rate vote.

Before the Iran war erupted at the end of February, most expectations were that its Monetary Policy Committee (MPC) would be focused on a series of cuts this year. But given an energy shock and early signs of higher inflation – up from 3% to 3.3% last month – those plans look to have been kicked into the long grass. The general view from economists is the MPC will keep its base rate on hold at 3.75% this time around, but that some of its nine members may vote for a hike to 4%. The Bank’s rate last rose by 0.25% back in August 2023. Matters have been further complicated by oil prices surging to $126 (£94) a barrel ahead of the vote – the highest since 2022 – amid reports the US is preparing a fresh wave of strikes on Iran.

So what might the next few months means for your finances, whether saving, loans, or your pension?

Mortgages

More than eight in 10 mortgage borrowers have fixed-rate deals that are locked in for a set time, usually two or five years.

While these aren’t directly impacted by base rate changes, lenders consider the likely path of this rate when setting the price new fixed products.. A typical two year fixed deal has risen by around one percentage point since the start of the war despite the Bank of England’s base rate remaining frozen at 3.75% since December. The jump has added £1,700 a year in repayments for a typical borrower taking out a £250,000 25 year mortgage, according to industry experts Moneyfacts.

Banks argue higher fixed rate costs reflect increasing ‘swap rates’, or how much it costs them to commit funds for a set period of time.

Lenders have begun to reduce those fixed rate deals for new borrowers. HSBC has announced new cuts of up to 0.31% for first-time buyers, home-movers and those needing to remortgage. Standouts include 4.45% on a two-year 60% loan-to-value (LTV) for home buyers, 4.69% for a two-year 75% LTV for first time buyers, and 4.79% for a two-year 75% LTV for those remortgaging. The Nationwide building society cut rates across its fixed mortgage range for first-time buyers and home movers by up to 0.25% last Friday, with its lowest rate now 4.50%.

David Hollingworth, associate director at broker L&C Mortgages, said: “The story for mortgage rates has understandably focused on the sharp spike in fixed rates since the outbreak of the Iran war. The threat of the rising cost of living has heightened market expectation that interest rates will have to rise or remain higher for longer.

“In recent weeks fixed rates have begun to ease back and there are still lenders feeding through improvements to fixed rates. Whether that will continue is far from guaranteed, as swap rates have edged higher amidst ongoing uncertainty.”

Although most borrowers continue to favour fixed rates, more are now considering whether a tracker rate could be a better option. Hollingworth added: “A wider margin between fixes and the initial rates on tracker deals has seen more borrowers betting on base rate only seeing a gentle increase, if it rises at all. Others will be hoping that fixed rates can improve further and are using a tracker with no early repayment charges as a holding position, allowing a switch to a fixed rate at a later date. Of course, if rates do climb it will push payments higher, so this strategy is likely to appeal to those with more flexibility in their monthly budget.”

Adam French, head of consumer finance at Moneyfactscompare.co.uk, said: “With funding costs still volatile and limited room for meaningful further cuts, the affordability squeeze is likely to continue feeding through into the housing market over the coming months.”

Savings

With the Bank of England’s base rate on hold, but inflation rising, savers are set to be squeezed.

The average easy access savings rate is now 2.46%, and a not much better 2.75% on an easy access ISA, says Moneyfacts. With inflation at 3.3%, anyone getting those averages on their money will be worse off in real terms.

But there are plenty of products paying more. For example, the average one-year fixed rate savings rate is 4.05%, while the average one-year fixed cash ISA rate is 4.16%. According to Moneyfactscompare.co.uk, the best paying easy access accounts include Tesco Bank’s 4.12%. It’s variable – so could change – and includes a 3.07% bonus for the first 12 months.

Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “Savers should not hesitate to chase down a better deal, they must escape the apathy trap regardless of any moves to the Bank of England base rate. Apathy is dangerous when it comes to maximising interest returns, so savers need to feel inspired to shop around to take advantage of top rates. The best deals are typically offered by challenger banks and mutuals, and they work incredibly hard to entice new business. Building societies are also consistent and offering a fair value, in line with their principles to support their members.”

She went on: “Savers who have their nest egg in a closed account (those no longer on sale to new customers) could be missing out more than they realise, and they could see the real value of their cash diminish should inflation spike. However, they could hold out for longer with real returns by proactively switching to on sale accounts, offered by providers who breathe life into the savings market. A closed easy access account will be earning a pitiful 2.39%, which results in a loss of £322 a year if savers were instead to invest £20,000 into an account earning 4.00%. This could be even worse if the cash has been languishing in an old account paying a paltry rate, so it’s wise to review any accounts at least once every six months or so.

“As it stands, around half of UK savings accounts on the market can beat 3.75%, the current Bank base rate, so savers might feel positive, but the months ahead are looking bleak and any interest earned moving forward could be squandered due to the cost of living.”

Pensions

More than 12 million pensioners saw the state pension rise by 4.85% – up to £575 – earlier this month. But rising bills mean many older people are likely to feel the squeeze if inflation rises in the months to come.

Mike Ambery, retirement savings director at Standard Life, said: “With the longer‑term outlook for prices and interest rates uncertain, one of the most important things people can do is take stock of where their retirement income is coming from and whether it’s still doing the job they need it to.

“That could mean reviewing spending, checking entitlement to the state pension, or looking at whether all or part of your pension savings could be used to provide more certainty over your future income.”

There is good news for those looking to get an annuity and a guaranteed regular income for the rest of their life.

Average rates for a healthy 65‑year‑old are currently close to decade‑high levels, at around 7.6%, meaning £100,000 of pension savings could provide an income of roughly £7,600 a year for life. Ambery explained: “With markets currently pricing in a higher‑inflation, higher‑interest‑rate environment, annuity rates could have further room to improve, although the long‑term impact remains uncertain. Importantly, annuities don’t have to be bought at the point of retirement – they can also be secured later on, allowing people to respond to changing circumstances and lock in income when it feels right for them.”

Which way are interest rates heading?

That is a key question everyone is looking to answer at the moment. The pressure seems to be upwards, but it depends what happens to inflation over the coming months (April could actually record a dip because of a fall in Ofgem’s energy price cap), wage growth and the state of the economy.

Matthew Ryan, head of market strategy at financial services firm Ebury, said: “We are erring towards either no change or, at most, one hike from the MPC this year.”

But Susannah Streeter, chief investment strategist at investment service Wealth Club, said: “Financial markets are now pricing in as many as three rate hikes from the Bank of England. It’s a marked difference from last week’s expectations of just one hike. As a result, fresh repricing of mortgage deals higher is looking more likely. There had been some respite, with offers lower than the peak they reached in mid-April, but they could well move higher again given the volatile changes in market expectations.”

TUC General Secretary Paul Nowak said: “Higher interest rates are the last thing working people need right now. “Coupled with Trumpflation, higher rates would pile the pressure on already stretched families and businesses. The Bank must remain focused on cutting rates as soon as possible. Lowering rates would provide vital support for economic growth, which is an important part of the Bank’s remit too.”