Personal Loans

Secured Loans

Other Loan Types

Residential Mortgages

Buy to Let Mortgages

Other Mortgage Types

Mortgage Payment Protection

Life Insurance

Other Finance

Unexpected Rate Rise

Towards the end of last year, most economists believed that the year would end with a rise in rates, followed by a further increase during the first quarter of this year. True to their predictions, last November did indeed see the Base repurchase rate increase to 4.75%, and a further increase took place in the first quarter of this year – what has been a surprise though is how soon in the year it has happened.

None of the economists expected the MPC (Monetary Policy Committee) to raise rates during January, so this move taking rates to 5.25% came as a real surprise to everyone involved in the financial markets.

The surprise was exactly what the MPC wanted from this move, they felt that consumer spending was increasing too fast, and that consumers’ comfort with having large debts was getting out of control – the move to increase rates was made as early in the year as possible, in order to send a message to people, to get them to sit up and take notice.

Given the amount of coverage the move has had in the press suggests that their approach has merit, it certainly has generated more buzz than the normal expected rate changes do. Why then does the MPC want to get people’s attention so much in relation to this rate rise?

The simple answer is because it fears that the consumer price index (CPI), a measure of headline inflation, is in danger of exceeding 3% - something that would be a first since The Bank took control of interest rates, and an event that would require the governor Mervyn King to write to the Chancellor to explain why inflation has been allowed to run so high above the target two percent.

By taking the decision to increase rates so soon after the holiday period, the MPC is obviously hoping that borrowers will feel the pinch, and that it will slow their appetite for both spending and borrowing, which should in turn reduce inflation in the CPI and allow the economy to stabilise.

Any changes in interest rates will affect those with mortgages that track with the base rate, and this increase will mean larger monthly repayments for those with such mortgages. Many people in the UK have some form of fixed rate agreement, for people in this situation, the rise in rates won’t affect their monthly outgoings, at least not for the period in which their rate is fixed. It is only once the fixed rate period ends, and the mortgage changes to the standard variable rate that any rate changes will take effect, and by that time it is of course possible that rates will have fallen again.