What is the Bank of England Base Rate?

by | Wednesday 15th Feb 2023 | Mortgage Insights

Before ‘Goblin Mode’ was announced as Oxford Dictionary’s word of the year, I would have predicted that ‘Base Rate’ would be a strong contender to take the crown in 2022/23! As a phrase that has dominated the British papers over the last 12 months, it is very surprising to see the sheer volume of people googling ‘What is the BoE base rate?’. And understandably, this lack of knowledge around what it is, where the current Bank of England base rate rests, and when the next Bank of England base rate meeting will take place, has created a culture of extreme uncertainty and worry. But have no fear, in this blog Oportfolio Mortgages will answer all of your burning questions about the base rate from the Bank of England.

What Is The Bank Of England Base Rate?

So let’s start with the fundamentals, what is Bank of England base rate? The Bank of England is the central bank of the United Kingdom. Based in an large imposing white-stone building on Threadneedle Street in the financial district of London England. The bank was established to create cohesion with finances in the UK and to ensure that everyone plays by the same book when it comes to money in the UK.

One of the ways that the bank does this is by controlling the base rate of the country. So does base rate mean? The Bank of England base rate is the benchmark rate that the BoE charges banks and other financial institutions for loans that they borrow. These other financial institutions then charge their own rate of interest on top of the base rate so that they can make a profit too. The base rate has been around since pretty much the beginning of the Bank of England has proven to be a very necessary thing. That is basically the base rate in a nutshell.

Bank Of England Base Rate History – 20 years

The BoE base rate from 1980 to 2000 (source: tradingeconomics.com)

As well as regulating lending and ensuring that monetary policy is followed by banks and other financial institutions, the Bank of England is responsible for ensuring that the UK economy is stable and responsible for taking action if things like inflation become too high to be sustainable. Over the years, the Bank of England has saved the UK economy on many occasions, despite not always making popular decisions.

In recent years, the BoE has been somewhat demonised for increasing interest rates and ‘making everyone worse off financially’ during the current UK economic crisis. And the BoE base rate history hasn’t always painted them in the best light. But everything that the BoE decides on and does is carefully assessed by experts in the monetary policy committee and implemented to keep the UK economy afloat. Let’s look at the economic crisis of 2008 as an example of how the Bank of England stepped in.

In 2008 and the years leading up to 2008, the UK economy was in a dire place as well as the rest of the world. Lending money had become cheap and reckless from banks, especially with the housing market. This caused a housing bubble which inevitably burst leaving banks with invested billions in properties that were not worth the same as they were before. This, among many other factors, caused a lot of banks to completely collapse and millions of people to lose money. At this time, the BoE base rate was at 5 to 5.75% and mortgage interest rates were at 6 to 7%.

As a means of alleviating financial struggles, the Bank of England actually cut interest rates so that by March 2009 the base rate sat at 0.5% and stayed this way for a whopping 7 years before dropping again to 0.25% in 2016.

Bank Of England Base Rate Changes Over The Last 3-Years

However, during the COVID-19 pandemic, spending and earning understandably decreased significantly due to various lockdowns. As a reaction to this, the BoE reduced the base rate 0.10%. This meant that the cost of goods and interest rates in the UK reduced, alleviating financial struggles for many during the pandemic. Despite a small increase, the Bank of England base rate 2021 was still at a very low level of 0.25%.

As we can see from the Bank of England base rate graph, the base rate was very low for around a year before starting to creep up. This is another example of how the BoE has used the base rate to bring stability to the economy. Due to many factors like overspending and the fallout of the covid-19 pandemic and the war in Ukraine making goods and fuel more difficult to buy, inflation has increased by 8.8% from 2022 to 2023.

As a means of discouraging borrowing and spending and therefore reducing inflation, the BoE has now increased the base rate to 4% from 0.1% in 2020 (as of the time of writing this article). Meaning that general interest rates have increased across the country. Inflation is thankfully coming down, which should mean that the BoE base rate will decrease and the cost of living will be more comfortable. But let’s look at some Bank of England base interest rate predictions from experts.

The BoE base rate over the last 23 years (source: tradingeconomics.com)

Bank Of England Base Rate Predictions

The general consensus is that because inflation is coming down, interest rates should come down over the next few years. Financial analysis website Trading Economics predict that the base rate will come up again fractionally but will ultimately come back down sooner rather than later. They say:

‘The Interest Rate in the United Kingdom is expected to be 4.25 percent by the end of this quarter, according to Trading Economics global macro models and analysts expectations. In the long-term, the United Kingdom Interest Rate is projected to trend around 4.00 percent in 2024 and 3.25 percent in 2025, according to our econometric models.’

Economists from Focus Economics predict a similar trend saying:

‘The consensus is for the Bank Rate to peak at slightly over 4% in mid-2023, with forecasts for the peak level ranging from 3.75% to 4.50%. Analysts at Goldman Sachs are at the hawkish end of our panel expect another 50bp hike in February, followed by 25bp hikes in March and May for a terminal rate of 4.5%.’

And finally, the last of our BoE base rate predictions comes from an article written for Standard Life by Phoenix Asset Manager, who say:

‘We view the Bank of England as a ‘reluctant hiker’. We believe that persistent inflation and the tight labour market will force the monetary policy committee to take interest rates to 4.5% by next May – a little higher than what we believe is their ideal landing zone.’

What Is The Monetary Policy Committee?

Monetary Policy Committee

Monetary Policy Committee (Source: BBC)

The monetary policy committee is a committee of bankers, economists, and other financial experts who meet on behalf of the Bank of England to officially decide the UK’s interest rates. The committee analyse data on inflation, spending, outside factors and relations with other world markets to determine what action the bank should take to better the UK economy.

They officially meet 8 times a year and each meeting is conducted over 3 and a half days. However, during particularly challenging times like we are experiencing at the moment, the MPC has been known to make emergency meetings an exception to the usual schedule. For example, most of the recent rate increases since September 2022 have been out of schedule.

When Is The Bank Of England Base Rate Next Review?

This is difficult to say as it does change, as we’ve mentioned above, when an urgent meeting needs to take place. However, the MPC does release a list of scheduled meetings that they try to stick to. The Bank of England base rate next meeting at the time of writing this article will take place on Thursday the 23rd of March 2023. In this meeting, they will once again review the data collected over the last month, assess the current state of inflation and the UK economy in general and will together decide if they will be increasing the base rate again, keeping it at the same level, or (unlikely at the moment) reduce the rate.

As we have seen from the predictions by expert economists, it is likely that the current BoE base rate will increase from 4% to somewhere between 4.25% and 4.5% as inflation is still higher than the BoE would ideally like. Inflation in the UK currently stands at 10.1% and the BoE’s aim is for this to be down to around 2%, so as you can see, there is still a long way to drop. inflation is decreasing though and hopefully this last little push to the base rate will encourage inflation to drop in the next few months to few years.

Bank Of England Base Rate Mortgage Implications

Bank of England

Bank of England (Source: Walk London)

As mortgage experts, it would only make sense to bring it all back to our specialty! As mortgage lending and payments are directly linked to the base rate, how much you pay on your mortgage will change. As the base rate increased at the end of 2022, mortgage lenders also increased their rates to both discourage borrowers who can’t afford a mortgage during the economic crisis and to also make sure that their lending was still profitable. Due to a 3.5% Bank of England base rate change over the last 2 years, mortgage rates rose to between 6 and 7% and have since reduced to between 4.5 and 5%.

So we have hear the Bank of England base rate forecast from economists, now here is the mortgage rate forecast from mortgage advisors. We believe that the initial rate hike to 6 and 7% was an overreaction by lenders and they have now realised that it has only hurt their profitability and lending potential. We can clearly see this by the rapid reduction in rates over the last couple of months. Because of a reduction in lending, it seems that there is now a bidding war between lenders to reduce their rates and encourage more borrowers.

In our opinion, mortgage interest rates will continue to come down, even if the Bank of England base rate today or in the future increases as lenders are hungry to lend. We think that the days of 1 or 2% mortgages are over unfortunately but rates will probably level out at between 3 and 4% over the next couple of years. Still a very competitive rate in comparison to historic lending.

UK Bank Of England Base Rate

And that is pretty much all you need to know about the Bank of England base rate to understand what they do, why they are being spoken about so much recently, and most importantly why the base rate increasing and decreasing is so important for you to be aware of. So what is next? There are several more scheduled meetings set to take place for the MPC in 2023 and things are certainly looking like they are going in the right direction. The base rate currently stands at 4% and could possibly be at 4.5% by the end of the year, but all arrows point towards the base rate coming down over the next couple of years, returning to a level last seen in the early 2000’s.

Mortgage interest rates will also likely continue to come back down meaning that potential borrowers should have more confidence in returning to the market, securing manageable rates between 3 and 4% and avoiding expensive standard variable rates and tracker rates. As mortgage advisors, we see it as our duty to understand the economy and the Bank of England so that we can provide out clients with the best guidance and information to make sure that they are getting the best and most sensible deal.

if you or anyone you know wants to discuss the base rate, the economy, and mortgage borrowing in more in-depth detail, please feel free to give our office a call today. Our expert mortgage advisers are on hand to answer any questions you have and help you with any concerns. We are here to help. Give us a call today or drop is a message for a free chat with one of our mortgage experts. 

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