Interest rates are likely to see yet another increase this week, reaching their highest rate since 2008. The Bank of England will announce its latest interest rates on Thursday, May 11, with another increase widely expected – the 12th in a row – in a bid to bring the cost of living crisis under control.
It comes after figures last month showed inflation remaining stubbornly high. The Office for National Statistics (ONS) revealed that Consumer Prices Index (CPI) inflation fell to 10.1% in March from 10.4% in February. But this was higher than the 9.8% forecast by many experts and well above the Bank of England's (BoE) target figure of 2%.
Despite rising headline figures inflation and interest rates are expected to peak shortly before falling in the coming months, although there is some uncertainty about these predictions. Here is everything you need to know about how much interest rates could rise on Thursday, what it will mean for mortgages and savings, and when rates are likely to finally fall. To get all the latest money-saving news straight to your inbox sign up here.
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What is likely to happen on Thursday and what will it mean for mortgages?
Economists and the markets expect the BoE to increase interest rates from 4.25% to 4.5%. This would be the 12th consecutive rise since December 2021 when the rate was just 0.1%. But there are signs that this may be the peak for rates with inflation expected to fall this year along with other key costs.
The Guardian reports that Michael Saunders, who was a member of the Bank's monetary policy committee until August, said the UK was nearly at a “turning point” for interest rates and estimated that rates would become more stable. He added: "The big tightening cycle – interest rates going up meeting after meeting – I think that’s largely over and what you’ll see over the rest of this year is inflation crawling lower, interest rates stable.”
The Bank raises interest rates as a way to bring down inflation but means many will face higher borrowing costs. The biggest impact of rising interest rates will be for the roughly 33% of people in the UK who have mortgages. This is because increasing the base rate of interest means that many on tracker and variable deals often see an almost immediate increase in their monthly payments as they are set against this base rate. For example in September the Bank of England raised interest rates in from 1.75% to 2.25% – the seventh rise since December 2021 and the highest they've been in 14 years. This had an almost instant impact on those with tracker deals with the Financial Times using an example that a tracker rate rising from 3.5% to 4% would cost almost an extra £60 a month on a £200,000 loan.
Financial journalist Martin Lewis previously spelled out the huge impact this could have on your finances in a MoneySavingExpert newsletter where he said: “For each one percentage point your mortgage rate increases, expect to pay roughly £50 more a month (£600/year) per £100,000 of mortgage debt.” He added that rising rates “will likely push millions renewing when their fixes end into 'can't pay my mortgage' territory".
What is currently happening with mortgages?
Despite rising interest rates the outlook on mortgages is better than it was last September when the UK Government's disastrous mini-budget wreaked havoc on the financial markets. At the time more than 40% of all mortgage products were pulled overnight after then-chancellor Kwasi Kwarteng's mini-budget triggered a slump in the pound and fears of further interest rate hikes.
Major lenders including NatWest, Barclays, Halifax, and Virgin Money all pulled deals and brought them back to the market at higher prices. But rates have settled somewhat since then. According to Moneyfacts there were 5,146 residential mortgage deals on the market in April. The number has climbed from 4,372 since the start of March and is nearing the 5,300 recorded in December 2021 before interest rates began to climb.
The market has even seen the return of 100% no-deposit mortgages for the first time since 2007. Skipton Building Society is offering a five-year fixed mortgage targeting renters who are struggling to save for a deposit though there are some conditions which you can read here.
Mr Lewis, founder of MoneySavingExpert.com, said 100% mortgages returning "leaves me with mixed feelings". He added: "Years of property-porn TV shows have spouted the idea that you must buy a house as soon as possible, as big as possible – actually, the real priority is not to overstretch your finances. Before the 2007 financial crash banks would simply throw mortgage loans out to anyone walking past a branch window; now we need to be more careful. So Skipton Building Society's criteria of requiring a good rental track record to prove someone can make mortgage payments is sensible and so I cautiously welcome it, done carefully, after advice, as an option for some."
What about energy prices?
In inflation forecasts other major factors are taken into account including energy prices which have risen hugely in the past two years. But this soon may change too. Currently the energy price cap, which regulates how much the typical household is charged for gas and electricity, is predicted to fall to £2,024 from July. This is below the UK Government's energy price guarantee of £2,500, and will mean bills should finally start falling for households (though they will still be much higher than they were more than a year ago).
When will interest rates fall?
As with all economic predictions it is hard to tell with certainty when interest rates will start going down. But the IMF predicts inflation will fall to 6.6% in 2023 and 4.3% in 2024 and experts are predicting this, combined with falling energy prices, will mean this week's likely rise could be the last before a period of stability. This is good news for the millions of households which have been hit with a succession of crippling cost increases in recent times including energy prices, food, and council tax increases.
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