The base rate impacts what banks and lenders charge you when you borrow money – so for example, if you have a mortgage – as well as the rate they pay on savings
The Bank of England has held its base rate at 3.75% – but what does this mean for you?
The base rate is the core interest rate set by the Bank of England. It impacts what banks and lenders charge you when you borrow money – so for example, if you have a mortgage – as well as the rate they pay on savings.
The base rate had been cut from 4% at the last Bank of England meeting in December – but since then, inflation was confirmed to have crept higher to 3.4%.
The Bank of England uses its base rate to try and keep inflation – which is a measure of price rises – under control. It has a target of 2% inflation.
Andrew Bailey, the Bank of England governor, said: “We now think that inflation will fall back to around 2% by the spring. That’s good news. We need to make sure that inflation stays there, so we’ve held interest rates unchanged at 3.75% today.
“All going well, there should be scope for some further reduction in the bank rate this year.”
The majority of economists had expected the base rate to be held today and are predicting the next cut could come in April. The base rate was cut four times last year and is reviewed by the Bank of England every six weeks.
What it means if you have a mortgage
If you have a tracker mortgage, this moves in line with the base rate. This means you won’t see any changes to your monthly mortgage payments today, as the base rate has not been changed.
If you have a fixed rate mortgage, your payments are set for a set period of time and are not impacted by the base rate until your deal ends. This means your payments will also stay the same today.
The interest rate applied to a standard variable rate mortgage can change any time, although it typically reflects base rate changes. You are normally moved to the standard variable rate of your existing lender once your current mortgage deal ends.
Ben Thompson, director of home moving strategy at Mortgage Advice Bureau, said: “Since lenders will have already priced in this latest hold, the deals you see on the shelves today are likely as good as they’re going to get for a little while.
“Arguably, the smart move right now isn’t trying to wait out the market for a perfect moment that might not come: it’s about finding a deal that actually fits your life and your budget.”
What it means if you have a credit card or loan
If your credit card is linked to the base rate, then how much you pay back in interest can change when it is updated. The base rate has not changed today, so your monthly payments should stay the same. The average APR on a credit card is 35.8%.
Some credit card rates are variable and not explicitly linked to the base rate. This means they can change from time to time. Check your credit agreement to see how often yours could potentially change.
Interest rates on personal loans and car financing are normally fixed, so these should not change as you have already agreed set repayments.
If you are planning on taking out a new credit card or loan, you will likely find the rates on offer are still higher than they were previously.
Ian Futcher, financial planner at Quilter, said: “For households carrying credit card balances or personal loans, today’s hold means borrowing remains expensive. Credit card APRs remain historically high and are unlikely to fall quickly, even once base rate cuts begin.
“Anyone managing costly unsecured debt should focus on repayment or balance transfers where possible. Waiting for rate cuts to materially reduce credit card interest is unlikely to be an effective strategy.”
What it means if you have savings
Saving rates come down in recent months, following the previous Bank of England cuts. It is always a good idea to regularly review your savings to make sure you are getting the best rate for your money.
Chip currently tops the MoneySavingExpert.com savings table with an easy-access rate of 4.5% for new customers. This includes a bonus rate of 2.25% which lasts for 12 months.
The top fixed rate is 4.31% for five years from either Hampshire Trust Bank or Close Brothers. For a shorter fix, the top table one year product is 4.24% from Cynergy Bank.
Regular savings accounts offer the best rates, but you’re normally only allowed to make small deposits each month and some accounts restrict how many withdrawals you can make.
Principality Building Society pays 7.5% fixed for six months but you can only deposit up to £200 each month.
Sally Conway, savings expert at Shawbrook Bank, said: “While rates are still widely expected to fall later this year, inflation remains above the 2% target, meaning cash sitting in low interest accounts continues to lose value over time.
“For many savers, it is no longer just about finding a good rate. Our latest analysis of CACI data highlights a growing tax squeeze caused by frozen allowances and higher interest earnings.
“More than nine million accounts are now earning over £500 a year in interest, the personal savings allowance for higher-rate taxpayers.
“That means a growing number of people could face an unexpected tax bill on their savings as we move towards the end of the tax year.”