Interest rates rise: what could this mean for mortgage rates?

24th March 2023

The Bank of England has announced an increase of 0.25% to its Base Rate this month. This is its 11th consecutive rise and has pushed interest rates to 4.25%, which is the highest they’ve been for 14 years. 

The Bank keeps raising interest rates to tackle high levels of inflation. The rate of inflation in February climbed unexpectedly to 10.4% this week, up from 10.1% in January. And that’s still way above the Bank’s target of 2%.  

However, in recent weeks, there have been other factors for the Bank of England to consider in addition to the current inflation rate. 

At the end of February, the markets expected the Bank to raise rates at its next meeting in March, as part of their continued priority of combatting high inflation.  

But, earlier this month, the collapse of Silicon Valley Bank in the US created uncertainty in the financial markets. This gave the Bank of England another issue to consider, as it also has a duty to maintain financial stability. And after initial concerns for the banking sector, the markets started to consider that a rate rise in March was less likely. 

Then, on 15 March, Chancellor Jeremy Hunt presented his Spring Budget and said that he expected inflation to fall back to 2.9% by the end of the year. This was received as a positive sign by the markets, and indicated that interest rates had either peaked already, or were about to peak. 

The following week, in response to the rushed buy-out of Swiss bank Credit Suisse, the market’s perception that maintaining stability and keeping the Base Rate at 4% outweighed the need to address inflationary pressures.  

The Bank of England moved quickly to reassure the markets and said: “The UK banking system is well capitalised and funded, and remains safe and sound.” 

However, on Wednesday 22 March, the UK inflation report was published, showing an unexpected increase to 10.4%. This changed things again, as it meant the Bank’s primary focus when making today’s decision has been to increase interest rates again to bring inflation back towards its target of 2%. 

Our mortgage expert Matt Smith says: “This has been an unusual six weeks, which started off with a Base Rate rise looking almost certain, to then quickly looking unlikely. And then, within the last 48 hours, the outlook changed again following the publication of the inflationary figures. This has culminated in the Bank raising rates to 4.25%.” 

How might today’s interest rate rise impact mortgage rates?

Changes to the Bank’s Base Rate matter because it could impact how much interest you’ll pay on loans, including mortgages. If you’re on a fixed-rate deal, your monthly payments won’t change. However, if you’re on a variable or tracker mortgage, your payments will almost certainly go up. 

Earlier in the year, the markets were predicting that the Base Rate might need to rise to around 4.5% in the summer, before starting to fall. And earlier this month, we’d seen mortgage rates start to level out, after falling from the highs they reached after September’s mini-budget announcement. 

Matt says: “Over the last few weeks, lenders have largely kept mortgage rates flat while they awaited the outcome of three key events: the Spring Budget; the UK inflation rate report; and today’s Base Rate decision. This means that current mortgage rates already factor in a rate rise in March, so we won’t necessarily see mortgage rates increase following today’s decision.” 

“The fact that the rate rise is lower than the previous rise, along with the longer-term indication that inflation is still likely to fall sharply over the year, should now give lenders more confidence to start to edge down their rates. Lenders will wait to see how markets respond to the Bank’s rate rise announcement before they reprice their deals,” he adds. 

What are mortgage rates looking like right now?

Based on today’s decision, the outlook is that 5-year-fixed mortgages are likely to continue to be priced lower than their 2-year equivalent rate products. 

You can check the current average mortgage rates for home-buyers, for different deposit and loan sizes, which we update on a weekly basis. 

The Bank of England’s next interest rate announcement is scheduled for Thursday 11 May. 

*copy from rightmove.co.uk