The Bank of England (BoE) has decided to pause interest rate hikes, holding the current base rate at 5.25%. This move, announced on Thursday, is expected to bring relief to millions of households, as it marks the first time since December 2021 that the central bank has chosen not to raise rates.
In August, the BoE had raised the base rate by 0.25 percentage points from 5% to 5.25%. Some economists had anticipated a 15th consecutive rise to 5.5%, which would have been the highest rate since 2008. However, recent inflation figures are believed to have eased the pressure enough to pause rates this month.
The Consumer Price Index level of inflation decreased from 6.8% in July to 6.7% in August, according to the Office for National Statistics (ONS). The decline in inflation rates led to a significant shift in expectations. Prior to the release of these figures, there was an 80% expectation of rates rising, which fell to around 50% after the figures were released, as reported by AJ Bell.
Suren Thiru, the economics director for chartered accountant group ICAEW, has said that raising interest rates would be a “misstep” following the surprise fall in inflation. Similarly, the Federation of Small Businesses (FSB) stated that this decision should mark a peak for UK interest rates “one way or another”.
Chancellor Jeremy Hunt claimed that the fall in the CPI rate shows that “the plan to deal with inflation is working – plain and simple”. He also stressed on the importance of sticking to their plan to halve inflation from 10.7% to around 5.3% by year end.
The decision by the BoE will be welcomed by homeowners and borrowers who won’t see their current rates rise. Savers, however, are likely to see no change as banks won’t be as pressed to battle it out for market-leading interest rates.
The impact of the rate pause on mortgages, credit card and loan rates, and savings rates will vary. For instance, homeowners on variable-rate mortgages may not see their repayments increase immediately, but they could rise shortly after if interest rates were to be hiked. However, with the BoE’s decision to freeze current rates, lenders may opt to do nothing at all. This is a significant relief for those who have faced 14 consecutive increases to their mortgage bill.
For loans, credit cards and overdrafts, the cost of borrowing can go up if the base rate is hiked, as banks are likely to pass on the increased rate. However, due to the rate pause, no changes are expected for now.
Savers, who have been the main beneficiaries after the last 14 rate rises, are unlikely to see any change as banks won’t be as pressed to battle it out for market-leading interest rates. However, anyone currently getting a low rate on easy access savings could find it’s worth looking around for a better rate and moving their money.
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