Will the base rate rise again in 2022?

On December 16, the Bank of England surprised more than one by raising its key rate. Until last Thursday, its base rate had not increased for more than three years.

So, with inflation continuing to grab the headlines, will there be further base rate hikes in 2022? And if so, what will this mean for savers and those with mortgages? Let’s explore.

Why did the Bank of England raise the key rate?

The recent decision by the Bank of England (BoE) to raise the key rate was not entirely expected. Many had not expected the UK’s central bank to act days before Christmas, especially as only two of its nine members of the Monetary Policy Committee voted in favor of a hike in November.

That being said, the BoE’s decision to raise its rate to 0.25%, from an all-time low of 0.1%, will have been a relief to those worried about the current rate of inflation. This is because a higher base rate makes borrowing more expensive, which can help curb inflation.

Just a day before the BoE’s move, the ONS announced that the UK’s inflation rate now stands at 5.1%. As a result, the BoE obviously felt compelled to act to prevent inflation from spiraling out of control.

Will there be further base rate hikes in 2022?

At 0.25%, the current base rate is still well below historical levels.

To give an idea of ​​its current level, the base rate reached 5.75% in July 2007. It hovered around 5% for several years in the early 2000s, and in the 90s, it was close to 15%!

It should be noted that the BoE has a duty to ensure that the UK inflation rate comes as close as possible to the government’s annual target of 2%. With inflation currently hitting more than double that number, the BoE will almost certainly act again next year.

This point of view has been echoed by the BoE itself. Following its decision to hike its key rate last week, the BoE argued that “modest monetary policy tightening” was “probably necessary” to meet its 2% inflation target.

Economists also support the view that the base rate will rise again next year. The futures market predicts that the base rate will reach 0.5% by the spring and 1% by the end of 2022.

Meanwhile, the Office for Budget Responsibility has previously suggested that the base rate could exceed 3.5% by 2023.

How does a rising base rate affect savers and mortgage holders?

Base rate hikes are a double-sided coin. For savers, an increase in the base rate usually opens the door to higher savings rates. This is because a higher base rate means lenders face higher borrowing costs. This may therefore encourage them to offer better offers to savers.

On the other hand, a higher base rate is bad for those looking for a mortgage. This is because base rate hikes go hand in hand with higher mortgage rates. So unless you’re on a fixed term, the cost of a mortgage essentially gets more expensive.

However, it should be borne in mind that dropping the base rate from 0.1% to 0.25% should not be too much of a problem for mortgage borrowers. That’s because such a modest increase will add around £ 30 per month for someone with a 90% mortgage on the value of their lender’s standard variable rate (on an average house).

However, if further base rate hikes were to occur in 2022, it could put pressure on the entire housing market, especially if mortgage payments start to become unaffordable. For example, if higher borrowing costs mean homeowners are starting to struggle to keep up with their mortgage payments, it could potentially lead to a real estate crash, especially if it happens on a large scale.

To learn more about the impact the Bank of England base rate has on you, check out our article on what the base rate is.

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