*This article was published in August 2022 following the base rate decision. Some information may no longer be current.


The Bank of England has met and increased the base rate to 1.75. This is an attempt to control inflation, but how does it affect the rising cost of living?

Following the 2008 recession, the bank rate has remained at an unprecedented low. It dropped from around 5% to an average low of 0.5%, with a 0.25% increase in that number in August 2018. The BoE originally put this low rate in place to help the economy through the recession, then the pandemic. What we’re seeing now, then, may simply be a return to the norm. However, it seems to come with more impact now than it ever has before.

What do these changes in the bank rate mean for the cost of living? And is there anything you can do to combat inflation in your home?

Predicting changes

Some experts suggest1 that the base rate could increase to around 3% by mid 2023, but this is hard to predict, as no-one knows when the BoE will decide to increase it. However, there are occasionally signs that indicate there could be an imminent rise.

The voting record of the Monetary Policy Committee is available to the public. They meet every six weeks and in this period, and some members may lobby for a rise at these meetings. If you follow the minutes and records, you may start to see more and more members voting for a rise. This is often an indication that a rise is coming.

Prior to major decisions, the governor of the BoE, Andrew Bailey, often informs the media that the base rate may need an increase, as he did in July2, and this could be a precursor to further discussions.

What affects the bank rate?

As with all things financial, the events of the world affect how it fluctuates. The events in Ukraine and Russia had a significant impact in April and May, according to the Bank of England. This impact came from disruptions in the supply chain, as well as Covid-19 developments in China.

How the bank rate affects the cost of living

Inherently it’s not the bank rate that’s affecting the cost of living, but rather the high inflation rates that mean it has to increase. Remember, a higher base rate means you’ll earn more on your savings, despite the impact it has on your mortgage payments.

What really affects the cost of living is inflation, and the fact that it is outstripping benefits and wage increases. It has also been further exacerbated by some of the recent tax increases, high energy costs, and supply chain demands.

While this is certainly not the highest the interest rate has ever been (consider the historic 17% rate in 19793), just because it was higher once doesn’t mean any changes now are insignificant.

Combating inflation

Despite the coming rises, interest rates are still some of the lowest we’ve seen, but there’s no guarantee they’ll remain this way. And as inflation increases, which puts further strain on our financial system, so too will the Bank’s interest rates.

You can’t control inflation, nor the cost of living, but you can take steps towards remedying the things you can control. Take your mortgage, for example. How much you pay is tied directly to the base rate, unless you have a fixed rate mortgage.

If you’re concerned that a rise in the base rate is imminent and you’re concerned about having to pay more on yet another thing, then it may be a good time to remortgage and lock in a fixed rate.

Speak to a mortgage adviser today for some guidance and advice, especially if your fixed mortgage is coming to an end soon. You may have to pay an early repayment charge to your existing lender if you remortgage.

1The Bank of England, 2022
2BBC, 2022
3Bank Rate, 2022