Base rate rises to 0.75%

What is the base rate?

The ‘base rate’, also known as the base interest rate or bank rate, is the interest rate that a central bank, such as the Bank of England, charges commercial banks for loans. Essentially, it is the interest rate set by a central bank for lending to other banks.

Central banks adjust the base rate to control the interest rate that consumers receive. If a central bank increases the base rate, commercial banks will increase their interest rates and borrowing becomes more expensive. On the other hand, if a central bank decreases the base rate, commercial banks will decrease their interest rates and spending will increase because saving will be less advantageous for consumers. 

One way of looking at the base rate is to consider it as a balancing force that aims to keep inflation rates in check by indirectly influencing the spending and saving behaviour of consumers.

The base rate increases

As of 17 March the Bank of England has increased the base rate again in a bid to control the rapidly rising rate of inflation in the UK, increasing the rate to 0.75%. The base rate is now back to its pre-pandemic rate and marks the third time in a row, that the base rate has seen an increase. The Monetary Policy Committee (MPC) meets to review the base rate every 6 weeks.

It is crucial to see these increases in their international context, as Finance Editor for The Guardian, Nils Pratley comments: “Russia’s invasion of Ukraine, a fresh round of soaring energy prices, and more supply chain disruption have up-ended month-old assumptions that already looked wobbly. Thus we are in a land where inflation could end up being “several percentage points higher” than the Bank expected only last month. In the circumstances, the mini-surprise is that nobody on the Bank’s nine-strong panel wanted heavier action than a quarter-point rise in interest rates to 0.75%.”

How could these changes affect my savings?

Savers have been suffering since the base rate was reduced to an all-time low of 0.1% in 2020, with many accounts paying a paltry 0.01%. An initial reaction to the increase may lead some to think that savers will finally be in a better position. 

However, as account providers are in control with how they respond with their own rates, Thursday’s announcements about the new 0.75% base rate may not necessarily translate to rises in savings rates for some time. In the short term, this may be a second blow for savers, who will now be suffering from both high inflation rates and low provider rates. Check out our article on provider rates here for more information.

Anna Bowes, Co-Founder of savingschampion.co.uk, highlights this issue, commenting: “The detachment between movements in the base rate and movements in savings rates is proving more and more prevalent as time goes on. And with speculation that 2022 could see even more increases to the base rate, this should have been the year for savers. But, unless savers act and move their money from the providers who refuse to play fair, the situation won’t improve anytime soon, as by hoarding cash in accounts paying as little as 0.01%, this is playing into the unscrupulous banks' hands.” The full press release can be accessed here.

Determining what provider is best for your savings is crucial for a stable financial future. If you’d like to find out more about how we can help you plan and save in these uncertain times, you can book a free initial consultation where you can discuss your savings plans with one of our accredited advisers. Alternatively, you can give us a call on 0333 323 9065 to get in touch with a member of our team to find out more.

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Please note: This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. The value of your investments and the income from them can go down as well as up. The Financial Conduct Authority (FCA) does not regulate cash flow planning, estate planning, tax or trust advice.

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