Bank of England  

Don't panic over rules

Alison Steed

Alison Steed

In what must be the most pre-empted change to any economic measure in recent years, the Bank of England’s Monetary Policy Committee has put up the base rate. It has doubled to 0.5 per cent. 

Sounds dramatic, doesn’t it? Doubled. But when you are starting from such a low base – excuse the pun – as 0.25 per cent, a rise of 100 per cent was really the least we expected.

Yet this language, although accurate in every way, has been pilloried by some who think it is over-egging what has happened. To be fair, they have a point, since a 0.25 percentage point rise is unlikely to make a massive difference to many savers or borrowers.

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However, when it comes to headlines and the number of column inches given over to this rise, the first in a decade since the credit crunch, there is little doubt that IFAs will be inundated with calls from worried clients. Mortgage rates for those on variable deals – not just the standard variable rate of lenders, but discounted or tracker rates – will see their costs increase.

It is hard to remember how most lenders deal with rate rises – they have not been around for so long – but the likelihood is that you will see a fair number of lenders passing on the rate in full and, most likely, in time for Christmas.

If you have a £150,000 mortgage on the standard variable rate of 4.5 per cent over 25 years, then a rise of 0.25 per cent would mean payments would increase by more than £20 per month, according to calculations from David Hollingworth of L&C Mortgages. Yet if you are on this kind of mortgage rate anyway, you really are paying way over the odds, as there are much better deals available.

As it happens, around 90 per cent or more of borrowers with L&C in recent years have been taking out fixed-rate mortgages. So, for the time being at least, they will remain unaffected.

The decision by the MPC to raise interest rates at this juncture does seem a little unclear. Usually we would see a strong economy and rising inflation, which would present the need to pull the interest-rate lever to try to put the brakes on. But the economy is not growing that strongly at the moment, and if the BoE is right and inflation is thought to have reached its peak in October – which we will find out in the coming weeks – there should be little need to address that either. But we have no way of knowing that yet for sure.

Since one of the main drivers for raising interest rates is to get the pesky inflation rate back under control, it would have been anticipated that a rise in the base rate would translate to a boost to the value of the pound to make imports cheaper. But in the immediate aftermath of the rate rise, the pound’s value actually fell, so will increase the cost of imports, potentially raising inflation still further.