Bank of England UK holds interest rates amid warning inflation could hit 6.2% due to Iran war
The Bank of England has announced its next interest rates decision after it was confirmed that inflation had risen again last month
The Bank of England has held its base interest rate at 3.75% but warned of another inflation shock and potential interest rate rises later this year.
In an update today, the central bank said UK inflation could rise as high as 6.2% with interest rates peaking at 5.25% in a worst-case scenario if prices stay higher for longer due to the Iran war.
It said this could lead to “forceful tightening in monetary policy” and an increased risk of recession.
Analysts are already warning of a huge jump in the Ofgem energy price cap this July as the price of oil continues to soar. Ahead of the interest rates vote today, oil prices surged to $126 (£94) a barrel – the highest since 2022 – over fears of fresh US strikes on Iran.
Andrew Bailey, Bank of England governor, said borrowing costs were at a “reasonable place” but warned the Bank was monitoring the Iran war and its “impact on the UK economy very closely”.
Eight members of the Monetary Policy Committee (MPC) voted to hold interest rates steady, while one member wanted to increase the base rate to 4%.
Chancellor Rachel Reeves said: “The war in the Middle East is not our war, but it is one we have to respond to.
“Every choice I make will be about keeping costs down for families and businesses, without repeating the mistakes we’ve seen in the past that resulted in higher inflation and higher interest rates.“
The first effects of the Iran war were laid bare earlier this month when it was revealed that inflation – which measures the rate at which the prices of goods and services increases over time – had gone up from 3% to 3.3% in March.
Drivers have already been hit with higher petrol and diesel costs, while mortgage rates have risen across the board in recent weeks. UK firms have also warned they think food inflation could jump as high as 7%.
Economists had expected the base rate – which affects the interest that is applied to mortgages, loans and saving accounts – to remain unchanged because of rising prices.
Before the start of the war at the beginning of February, economists had said both interest rates and inflation were likely to fall this year.
The Bank of England uses its base rate to try and keep inflation under control.
The idea is that when interest rates are higher, people will spend less as their borrowing costs have increased – this in turn then helps slow down demand, which leaves businesses less able to raise prices, and price increases should slow down.
The Bank of England has a target of 2% inflation and meets every six weeks to discuss whether to change its base rate.
I have a mortgage – how does it affect me?
As the base rate has not changed today, then you should not see any immediate change to your mortgage repayments. There are different types of mortgages.
If you have a tracker mortgage, then this follows the movement of the base rate. If you have a standard variable rate (SVR) mortgage, then this also typically changes when the base rate is updated – although it is not strictly pegged to it.
Lenders can technically change the rate on this type of mortgage at any time.
If you have a fixed rate mortgage, you have agreed to pay a fixed amount every month for a set period of time. This means your payments are not affected by the base rate and won’t change until your fixed deal has ended.
Ben Thompson, director of home moving strategy at Mortgage Advice Bureau, said: “The Bank of England holding the base rate brings a welcome sense of stability at a time of ongoing uncertainty.
“While it won’t lead to an immediate drop in mortgage rates, it does support continued competition among lenders and gives borrowers a clearer backdrop to plan against.“
I have debt – how does it affect me?
If your credit card is linked to the base rate, then your interest rate can change when it is updated. The average credit card purchase APR is around 35.8%, according to Moneyfacts.
As there is no change to the base rate today, you should not see any changes to your credit card if it is linked to the base rate. But not all credit cards are linked to the base rate. As most credit card rates are variable, they can change from time to time anyway.
Interest rates on personal loans and car financing are normally fixed. This means if you’re in the middle of an agreement, this should not change even when the base rate is updated, as you have already agreed set repayments.
However, a change in the base rate can impact the rates that are applied to new agreements.
Charlie Evans, money expert at Compare the Market, said: “Credit card and loan rates are also unlikely to shift significantly in the short term, so comparing deals remains important.”
How it affects your savings
If your savings rate is variable, it can change from time to time, but if your money is locked into a fixed-rate account, then your rate will not change for a specified set of time.
MoneySavingExpert.com lists the best rates currently available, and cash ISAs currently pay more than standard easy-access accounts.
The best rate on an easy-access cash ISA is 4.51% from Trading 212 for new customers. This includes a 0.91% newbie bonus. You can pay up to £20,000 into an ISA each tax year and any interest you make is free from tax.
The best rate on a standard easy-access account is 4.5% from Chase for new customers. This includes a 2.25% newbie bonus.
If you can afford to lock your cash away, MSE says there are several two-year and five-year fixed rate accounts that pay 4.7%. For a shorter fix, MSE lists a one-year fixed account from MBNA that pays 4.66%.
Regular savings accounts offer the best rates, but these come with strict terms and conditions. You can normally only make small deposits each month and some accounts restrict how many withdrawals you can make.
Zopa pays 7.1% variable for six months but you can only deposit up to £300 each month.
Susannah Streeter, chief investment strategist at Wealth Club, said: “Far too many people squirrel money into instant access savings accounts paying paltry amounts of interest. With inflation set to ramp up, it’ll eat away at the real value of stashed cash.”