Tight vote to hold rates at 5.25% but door left open for further hike

It was about as close as it gets but today’s decision by the Bank of England’s Monetary Policy Committee brings to an end almost two years of consecutive hikes and will be welcomed by homeowners and businesses alike.

Increasing the cost of borrowing was intended to cause pain, and to make people think twice about spending their hard-earned cash in a bid to tame raging inflation.

The tight vote highlights the fact that the job is far from done. Inflation is still more than three times the bank’s target and a recent surge in the price of oil is cause for concern.

But cracks are beginning to show in the UK economy. Job vacancy numbers are falling, growth has stalled, and the lag between implementing monetary policy and the impact being felt by the wider economy created enough uncertainty that five members decided a degree of caution was prudent.

Mortgages

For millions of homeowners who’ve already seen their mortgage payments increase or the half a million facing a hike in the run up to Christmas, today’s decision will be cold comfort. 

Costs have skyrocketed as ultra-low rates were left in the rear-view mirror and though competition is gradually returning to the mortgage market and the number of products available has increased*, those coming off fixed rates are facing a big cost of mortgage shock.

A £100,000 loan taken out in September 2021 would have cost £443 in monthly repayments. The exact same borrowing today on an average two-year fix comes in at £688 a month.**

Even factoring in some capital repayment and assuming they could secure the best two-year fix (5.61%), repayments would still be £584 on the £94,012 loan and there are sizeable products fees for that mortgage.

For mortgage holders who chose not to fix but instead have endured the punishing standard variable rate which topped a record breaking 8.09% at the start of September, there is hope that locking into a new fix could start to look more attractive following today’s decision.

Markets think the peak has been reached with over 70% anticipating another hold at the next meeting in November. But anyone hoping that the base rate will make a swift return from whence it came is going to be sorely disappointed, as rates are expected to remain high for some time to come.

*Number of mortgage products: 5,338 as at start of September – highest since February 2022 (Source: Moneyfacts).

**Average two-year fix 6.70% at the start of September – average five-year fix 6.19%. For comparison in September 2021 average two-year fixed rate stood at 2.38% (Source: Moneyfacts)

Savings

There has been better news for savers as under pressure banks have begun offering competitive options:

• Best easy access account: 5.10%
• Best one year fixed rate bond: 6.2% (NS&I)
• Best notice accounts: 5.35% (90 days’ notice)
• By comparison, at the start of December 2021 the top easy access account was 0.75% and came with some catches regarding withdrawals*

But savers need to be aware of a potential pitfall to this change in fortunes. Figures obtained by AJ Bell from HMRC show that an estimated 2.7 million individuals will pay tax on cash interest in the 2023-24 tax year.

Increased savings rates coupled with a frozen personal savings allowance mean savers need to be savvy with their cash and consider tax wrappers like ISAs if they don’t want to experience an unpleasant side effect. 

*Source: Moneyfacts 

These articles are for information purposes only and are not a personal recommendation or advice. How you're taxed will depend on your circumstances, and tax rules can change. Tax and ISA rules apply.