Policymakers at the Bank of England are expected to raise interest rates on Thursday. It would be the first increase to the benchmark rate in more than three years.
Most analysts predict a rise from 3.75% to 4%. The move would increase the cost of borrowing for individuals and businesses, but it would also boost returns for savers.
The Bank rate has fallen from its 2023-24 peak of 5.25%. However, the Bank's Monetary Policy Committee (MPC) has kept the rate unchanged at its last six meetings.
Analysts say rising inflation, driven mainly by the cost of petrol and diesel, will push policymakers towards a rate hike. The Bank will announce its decision at 12:00 GMT on Thursday. Attention will also be on any signals from the MPC about the future direction of rates.
Inflation Pressures Build
Chris Cheverall, head of UK at trading platform CMC Markets, said: “The decision is increasingly less about whether rates reach 4% and more about what follows after that.”
He added: “A quarter-point rise is already widely expected, but the Bank now has to balance inflation that is still too high against an economy where the growth outlook has weakened sharply.”
The Consumer Prices Index (CPI) measure of inflation is well below its peak of a few years ago. However, it has been rising and is expected to climb further. It stood at 3.5% in the year to September 2026, up from 3.1% the previous month. That is well above the central bank’s 2% target.
The continuing impact of the Iran war, mainly through higher energy and fuel costs, has fed into UK inflation. Millions of domestic energy customers are preparing for a significant rise in prices in January.
What It Means for Mortgage Holders
The Bank rate is the rate at which the Bank of England lends to other banks and building societies. It influences the rates those lenders charge their own customers for mortgages and the interest paid on savings. The Bank last raised rates in August 2023.
If the Bank rate rises, around 510,000 tracker mortgage holders would be affected immediately. According to calculations by the banking trade body UK Finance, a 0.25 percentage point rise would add £31 a month to repayments for someone with a typical tracker home loan.
About 470,000 mortgage holders on variable deals would need to wait for their lender to respond to any Bank rate change. Typically, a 0.25 percentage point rise would add £14 a month to repayments.
Borrowers on fixed deals are not immediately affected, as their monthly payments do not change with a rate move. However, their future deals will be. Lenders have already priced in the expected rise when quoting new fixed rates.
As of 4 November, the average two-year fixed residential mortgage rate was 5.96%, and the average five-year rate was 5.99%, according to the financial information service Moneyfacts. Anyone coming off a five-year deal therefore faces a much larger mortgage bill.
The broker L&C said average rates offered by the 10 biggest lenders suggest some borrowers now pay almost £5,000 more each year on a £200,000 mortgage over 25 years than those who remortgaged in 2021. Five years ago, the average five-year fixed remortgage rate among the 10 biggest lenders was 1.30%.
Relatively high fixed rates have led some people to consider trackers, in the hope that rates will be lower even if the Bank rate rises in the coming months. Rachel Springall of Moneyfacts said: “The right choice ultimately depends on borrowers being confident they can stomach future rises. The devil is in the detail.”
The cost of some other new loans could also be affected by the Bank rate. Savers, meanwhile, could see the interest rates offered to them improve.
Ultimately, lenders and policymakers at the Bank of England must judge how the UK’s economic outlook may develop. That outlook is closely linked to changes in international events.
