When is the Bank of England interest rate decision? Will interest rates go up? How mortgage rates are affected

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The Bank of England will meet today to discuss its next decision on interest rates

The eyes of economists, businesses, and families will today be turning to the Bank of England's next interest rate decision.

Mortgage holders have been offered relief in recent months, as the Bank has chosen to keep interest rates on hold since they hit 5.25% on August 4, after 14 consecutive rises over two years.

While the rate is not historically that high - it was 5.75 in July 2007 - it has bee a shock over the last decade, as the rate was below 1% from March 2009 to May 2022. It is therefore now at the highest level since the 2008 financial crisis.

Inflation is the key driver for an interest rates decision. The inflation rate dropped slightly faster than expected in February, hitting 3.4% during the month, the lowest for two and a half years.

That is good news for the Bank of England, and will be welcomed by its decision-makers on the Monetary Policy Committee (MPC).

But analysts from BNP Paribas said on Wednesday that it was unlikely to make the MPC vote any differently from how it would otherwise. They still expect rates to be held steady, at 5.25%, during this week’s meeting, the result of which will be announced at midday on Thursday.

“We do not think that this morning’s data will move the needle for the BoE meeting tomorrow,” said Matthew Swannell, Dani Stoilova and Gerardo Martinez at BNP Paribas. “One area of the focus will be the vote split, with the largest uncertainty around whether hawk Jonathan Haskel changes his vote from a 25bp (base point) vote hike to a hold. By his own admission, his February vote for a hike was ‘finely balanced’, so it is difficult to call how he will vote tomorrow.

“Our expectation is that despite the BoE’s core services inflation dropping in February – which it would seem Haskel attaches some weight to – he will need further evidence of its being on a downwards trajectory before adjusting his vote. We expect an unchanged vote split.”

So, what will the Bank's MPC decide to do with it next meets? Will its economists continue to keep rates where they are and risk a resurgence in inflation, or will they return to their streak of hiking rates and risk a recession?

The Bank of England sets interest rates (image: PA) The Bank of England sets interest rates (image: PA)
The Bank of England sets interest rates (image: PA) | Yui Mok/PA Wire

What are interest rates?

Interest rates, as we know them in our daily lives, are extra bits of money we pay on top of a loan or receive back on our savings. They are there to maintain the value of the money being loaned or saved. In the case of loans, interest may also cover any risk the borrower presents to the lender.

But the Bank of England’s interest rate - also known as the base rate - is a little different. The UK central bank uses the mechanism to preserve the value of the pound - something inflation erodes. Given it is the source of all the pounds in the economy, when it ups its rate, it essentially makes it more expensive to get hold of money.

The effects of its decision then trickle down from banks to businesses and consumers over a period of several months. You will see it reflected in higher interest rates for loans, debts, or savings accounts - although there has been some controversy over the speed at which high street banks have been passing better savings rates on to customers.

Mortgages are influenced by the Bank of England’s base rate - particularly variable rate home loans, like trackers, which can go up, down or stay the same depending on each central bank decision. However, fixed rate mortgages - which most households are on - are also influenced by several other factors, including swap rates. It is why most mortgages don’t track the Bank rate all that closely.

At present, the UK’s interest rate is set at 5.25%. The last time it was this high was in April 2008, when the country was in the middle of a severe recession prompted by the banking crisis.

Another recession could be on the way later this year as a result of interest rates, with the latest S&P Global/CIPS flash UK purchasing managers’ index (PMI) - an indicator of private sector growth - showing higher borrowing costs have pushed the sector into a contraction. If this scenario happened, it would mean Rishi Sunak would have failed to deliver his pledge to grow the economy in 2023.

When is next Bank of England rates decision?

The MPC meets eight times a year to vote on how interest rates should be set. Its nine members are either Bank of England employees (including the governor Andrew Bailey) or independent economists, with the split working out at 5:4 between the two camps. A Treasury official also attends, but is not allowed to vote as the Bank is nominally independent of the government.

Their meetings tend to take place on a Wednesday with the decision then announced to the nation at midday on the following day. We will hear from them today.

Will interest rates go up again?

Since the Bank of England decided to keep interest rates at the same level since August, many are hoping the same will happen again - arguing that the Bank has reached its peak interest rate. And the recent drop in inflation helps the cause.

Rishi Sunak thinks the UK has entered into a “new economic moment” following a further drop in inflation. The Office for National Statistics said on Wednesday that Consumer Prices Index inflation stood at 3.4% in February – down from 4% in January.

Economists generally agree that cuts to the interest rate will come later this year – the Bank has signalled as much recently too – but they are less sure when the cuts will come. It would be the reversal of a four-year trend of rates being either hiked or kept unchanged at every Bank meeting.

In February, only Swati Dhingra voted to cut rates. Two of her colleagues on the nine-person MPC voted for a rise, but the majority thought that rates should stay unchanged.

“The direction of travel for UK inflation is certainly encouraging and supports the case for a policy easing in the near future,” said Ellie Henderson, an analyst at Investec. "Our base case is for a first interest rate reduction in June. Furthermore, it is not just about actual inflation, expectations play a strong part too. As inflation expectations fall, but the nominal policy rate remains constant, the real rate of interest rises, resulting in a tightening in monetary policy, without the Bank actually changing its stance.

Bank of England governor Andrew Bailey. Credit: PABank of England governor Andrew Bailey. Credit: PA
Bank of England governor Andrew Bailey. Credit: PA | PA

“The MPC will have that in mind when deciding on the appropriate time to cut interest rates. But for the meeting... [the] inflation numbers do not change our view, first set out in our preview, that the MPC is likely to convey the message that it has an eye on easing policy rates this year, but the hurdle to do so has not yet been overcome.”

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