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Bank Rate hits 2.25%, but what does that mean for borrowers? Our views.

The Bank of England’s Monetary Policy Committee (MPC) has, for the seventh time in a row, moved Bank Rate upwards today. It’s another half point rise, meaning that Bank Rate now sits at 2.25%. It means that the cost of borrowing is now at its highest level since all hell broke loose during the 2008 financial crisis. Not, it’s fair to say, a period of history many of us look back fondly on.

Of course, most of us are aware that the Bank is desperately trying to tackle the run-away inflation train, which currently sits at 9.9%, an eye-watering five times the bank’s target rate of 2%. And, while we’re talking inflation, predictions are now that it will peak at 11% in October. In a sea of bad news, this offers some (relative) consolation, as previous predictions had a peak of 13%.

There’s little doubt that the Bank is facing a tricky balancing act. One which even the most accomplished walker of tight ropes wouldn’t particularly fancy.

The devil of the detail

Looking in detail at the minutes of the MPC, the decision was firmly split. Of the nine members of the committee, five voted in favour of a 0.5% rise, whilst three voted for a 0.75% rise. The other member preferred a more cautious rise of 0.25%. Interesting, to say the very least. What it does show you is that even those who know more than most of us aren’t exactly sure what the best course of action is.

We do think that, unfortunately, this isn’t the end of the rises. Financial markets are predicting that rates may go as high as 5%, although for what it’s worth we think that may be a tad on the high side. All eyes will now be on November’s decision because, at this point, the Bank will calculate a new inflation forecast which will include all the recent government interventions in the energy markets.

What should borrowers do now?

Only a few months ago, the decision on what product to take was fairly easy. Fixed rates offered such value at most time periods, that they really were the product of choice. But you don’t need us to tell you that an awful lot has changed since then.

To give an example, one leading household mortgage lender currently offers a 2-year fixed rate at 75% Loan to Value for 4.15%. Their 5-year fixed rate is at 4.45%, and their 10-year fixed rate is at 3.65%. Whereas, looking at their 2-year tracker, a product that (as the name helpfully points out) tracks the Bank of England Base Rate, it is priced at 0.95% above Bank Rate. That means a current pay rate of 3.2%, almost 1% less than the fixed rate equivalent.

So, which product you take very much depends on where you think interest rates will go from here and how fast they will get there. If more significant rises happen quickly then fixed rates still look the more sensible choice, but if we get into a flow of steady rises, then there could be overall value in the tracker. And, of course, we need to factor in, as many commentators are predicting, that although the bank rate might rise to higher levels in the short and medium term, it may well start to fall back again after that.

All we can say is that it’s not easy to decide what to do. And therefore, generic advice is broadly worthless. Only individual evaluation of your situation is the right approach. No matter what, if you are due to come off your current rate at any point in the next six months, we should talk.

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