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Interest rates raised for first time in a decade to 0.5%

Simon Read
The Bank of England has acted to increa. Getty Images
The Bank of England has acted to increa. Getty Images

The Bank of England has increased interest rates for the first time in more than 10 years.

The quarter-point rise, from 0.25% to 0.5%, signals more increases are on the way as the Bank looks to cool surging inflation caused by Britain’s imminent exit from the EU.

Almost four million households face higher mortgage interest payments after the rise. The main losers will be the 3.7 million households with a variable rate or tracker mortgages.

They could see a rise of about £11 or £12 a month in their repayments, assuming an average outstanding balance of £89,000.

Charlotte Nelson, finance expert at, said: “Competition in the mortgage market has remained high and borrowers have experienced some of the lowest rates on record.

“However, the speculation prior to today’s base rate rise has been causing rates to slowly creep up since September and so today’s announcement may see an end to the lowest of deals.”

Mark Carney says the rate rise is a ‘modest adjustment’ (Dylan Martinez | AFP | Getty Images)
Mark Carney says the rate rise is a ‘modest adjustment’ (Dylan Martinez | AFP | Getty Images)

Policymakers on the bank’s nine-strong Monetary Policy Committee (MPC) voted 7-2 in favour, which marks the first rates increase since July 2007.

The Bank’s quarterly inflation report also suggested two more rate hikes were likely over the next three years to return inflation back to its 2% target, which could see rates hit 1% by the end of 2020.

The pound fell sharply against the dollar, down 0.75% to $1.3145, and it also fell against the euro, down 1.18% to €1.1264. The FTSE was up 39 points immediately after the announcement.

Bank governor Mark Carney said that with inflation at 2.9% and unemployment at its lowest level for more than 40 years, it was the right time to raise rates.

“It is a modest adjustment,” he said, adding that the degree of spare capacity in the economy was “very limited”.

Although it is the first rate in a decade, the climb will only take rates back up to 0.5%, where they were before the last cut 18 months ago.

But it could be just the beginning with many experts predicting it will just be a series of increases over the next year in an attempt to strengthen sterling ahead of Brexit and dampen inflation, which the Bank predicts will now peak at around 3.2% this autumn.

How will a rate rise affect you?

“Even a small increase in rates means that many families will have to tighten their belts to meet growing loan interest repayments, and do so with Christmas just around the corner,” warns Kate Smith, head of pensions at Aegon.

For savers an increase is good news, as they’ll get better returns on their nest eggs.

That’ll be particular pleasing to the 12.5 million UK pensioners living off their savings.

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But for the 12 million millennials potentially saving for a deposit on a house, the rate rise is a double-edged sword, Kate Smith warns.

“On the one hand they’ll earn more interest on their savings, but they’ll also see mortgage rates creep up, keeping a house purchase tantalisingly out of their grasp.”

Mortgage rates

Mortgages rates have been at record lows. Getty Images
Mortgages rates have been at record lows. Getty Images

A 0.25% increase in rates will have a modest impact on the minority of borrowers who are on variable rates, according to Nationwide chief economist Robert Gardner.

He reckons a rate rise will increase monthly payments by £15 to £665 for the average variable mortgage, or an extra £180 a year.

People with fixed rate mortgages will be unaffected by the rise – for the moment at least.

The Bank of England says about 2 million mortgage holders have never before experienced a rate rise, such have been the historic and lengthy lows.

But should you be rushing to get a new fixed rate deal? No, says Mark Harris, chief executive of mortgage broker SPF Private Clients.

“I’m not sure this is actually the end of the cheap mortgage deals,” he says.

“While a number of lenders have increased rates slightly, Nationwide actually reduced its mortgage rates this week and the ultra-competitive lending market remains.”

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He predicts that the increase is likely to be absorbed into lenders’ margins because they are still chasing business.

“The plethora of new lenders on the market means there is plenty of competition for business and lots of choice for borrowers.”

What about your stock market investments?

If you invest in shares or funds, the outlook won’t be much different after a rate rise.

“Rising interest rates turn the screw, but they will only happen if the economy is in good enough shape, which would be positive for company earnings,” says Laith Khalaf, senior analyst at Hargreaves Lansdown.

“In the scenario of low productivity we face in the UK today, both economic growth and the pace of rate rises are likely to be sluggish.”

However he reckons there could be some individual stocks which fare better than others, with the banking sector probably best positioned to take advantage of rising rates.

What about savings?

Nest eggs are still earning less than inflation. Getty Images
Nest eggs are still earning less than inflation. Getty Images

There is likely to be little immediate impact on savings rates, although one or two banks or building societies may quickly announce increases in an attempt to get a competitive advantage.

Even when the rate increase is passed on fully to savers, rates will still languish below inflation.

“An interest rate rise is a hollow victory for cash savers because it still won’t deliver a level of interest that keeps up with price rises,” points out Mr Khalaf.

“Tighter monetary policy will also take its time to filter through to cash savers because the banks will delay passing through higher rates to depositors for as long as possible.”