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Bank of England raises interest rates to 4%: What does this mean for your money?

Updated 22 June 2023

5min read

Craig Rickman
Senior Content Writer

The UK central bank continues its fight to get inflation under control. And it hopes to gain the upper hand later this year

Bank of England raises interest rates to 4%: What does this mean for your money?

Interest rate rises proved a dominant and recurring theme during 2022. And this year is shaping up for more of the same. 

At noon today, the Bank of England (BoE) hiked the base rate 0.5 percentage points to 4 per cent, the tenth successive time it has gone up, to reach its highest level since November 2008. 

This followed similar activity from across the Atlantic. On Wednesday, the US Federal Reserve (Fed) raised its key rate 0.25 percentage points to 4.75 per cent. Though this was the smallest rise in almost a year, the Fed warned more were to come. 

Both the Fed and the BoE are increasing rates to tackle inflation, which despite starting to fall, continues to pose a serious threat to your finances. 

By raising interest rates we can bring inflation down sooner, and make sure it stays low after that,”

the BoE said, adding that it expects inflation to fall quickly this year. 

Two developments earlier this week underscore some of the economic challenges facing the UK. Research from Kantar found that food prices rose to record levels in January, while the International Monetary Fund (IMF) warned Britain is expected to perform worse than any other major global economy in 2023. 

So, what do these developments mean for you, and most importantly, your money? 

Those keeping a close tab on BoE decisions over the past year might be familiar with the drill by now: when interest rates go up, your mortgage costs more, and your savings earn more. 

Except it’s not that cut and dried on this occasion, especially with regards to borrowing rates, which might actually fall over the coming weeks. 

Let’s take a closer look at what’s going on. 

Have interest rates peaked?

While it’s too early to say - and we’ll learn more once January’s inflation figures are revealed later this month - experts agree peak interest rates might be close. 

The consensus is the base rate will settle somewhere between 4.25 per cent and 4.5 per cent this year, possibly as soon as 23 March when the BoE’s Money Policy Committee meets again. 

The UK central bank’s decisions regarding interest rates are becoming increasingly delicate – it has a difficult balancing act right now. On one hand, hiking rates is deemed the most effective method to fight inflation. But on the other, the resulting higher borrowing costs is increasing the strain on both households and businesses. 

UK inflation crept downwards in November and December, dropping from its 40-year high of 11.1 per cent in October to currently stand at 10.5 per cent. But it remains painfully high. 

And we may have to wait a few more months before seeing significant falls, especially with the news that supermarket inflation soared to a record 16.7 per cent in January. The average grocery bill is expected to rise a hefty £788 this year. 

Furthermore, on Tuesday the IMF announced that it had downgraded its forecast for the UK, predicting it will be the only developed economy to shrink in 2023. The IMF said the anticipated 0.6 per cent contraction was due to a cocktail of higher interest, increased taxes, and soaring inflation. 

How will the latest rise affect my mortgage?

That very much depends on your current situation. Some of you won’t be affected - for the time being at least - while others will see your repayments go up. 

If you’re on a variable-rate mortgage, such as a tracker, your monthly costs will rise immediately. 

Anyone locked into a fixed rate will be shielded for now, but you may struggle to find a deal on equally favourable terms once your current deal expires. 

When interest rates rise, fixed-rate mortgage deals typically follow suit. But experts are split on whether that will be the case this time around. While some believe we’ll see increases of somewhere between 0.25 per cent and 0.40 per cent, others feel there will be little impact.  

That's because mortgage rates have been falling recently - after peaking at over 7 per cent in October in response to Kwasi Kwarteng’s ill-fated mini-Budget - and many expect this trend continue throughout the year. 

Earlier this week, the Telegraph reported that price wars are breaking out in the mortgage market, which could drive fixed rates below 4 per cent in a matter of weeks. However, deals would still be significantly more expensive than those available this time last year. 

The resulting impact on buyer affordability is cooling the property market. UK house prices have fallen the past five months in a row, while mortgage approvals plummeted to a 14-year low in December.

If you’re concerned about mortgage affordability or need help finding the right deal for you such as choosing between a tracker or a fixed rate, then it’s wise to seek expert mortgage advice. Click below to connect with a regulated broker today. 

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How will this affect my savings?

In stark contrast to borrowings, any money you have any savings should benefit from today’s announcement. 

The top savings accounts are currently paying 4.5 per cent, as long as you are prepared to lock your money away for at least two years. And savings rates could rise again off the back of the latest rate hike – though this isn’t guaranteed as banks and building societies are often sluggish passing increases onto savers. 

The key to finding the best rates is shopping around. And think carefully before locking your money away for a fixed period, as in most cases you can’t get your hands on it until the term ends. 

But before getting too excited about the higher interest rates on offer, you must consider the impact of inflation, which is still more than double what the top savings accounts will pay you. 

If you’re investing for the long-term, such as retirement or any goal that’s more than five years away, then you might be better off placing your money in assets that aim to beat inflation, such as stocks and shares

The value of your investments can fall as well as rise, but investing for long period gives you a better chance of riding out any periods where stock markets perform poorly. 

To ensure that you’re making the right choices with your savings and investments, it’s worth seeking advice from a qualified professional.

A regulated financial adviser will take the time to understand your savings and investments goals, and recommend a suitable and appropriate strategy for you to reach them. 

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About the author
Craig Rickman is senior content writer at unbiased.co.uk. He has been writing about personal finance and wealth management since 2016, including four years as a journalist at the Financial Times Group. Prior to this, Craig spent eight years working as a regulated financial adviser. He holds the CII level 4 Diploma in Financial Planning.