Interest rates expected to rise for first time in over three years

Interest rates are expected to rise for the first time in more than three years

Policymakers at the Bank of England are expected to increase interest rates on Thursday, which would be the first rise in the benchmark rate for more than three years.

Most analysts are forecasting an increase from 3.75% to 4% in a move that would raise borrowing costs for individuals and businesses, while benefiting savers.

The Bank rate has dropped from its 2023-24 peak of 5.25%, although 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 an interest rate rise.

The Bank will announce its decision at 12:00 GMT on Thursday.

Attention will also focus on any signals from the MPC about the future path of interest rates.

"The decision is increasingly less about whether rates reach 4% and more about what follows after that," said Chris Cheverall, head of UK at trading platform CMC Markets.

"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 from a few years ago, but it has been rising again and is expected to climb further.

It was 3.5% in the year to September 2026, up from 3.1% the previous month and well above the central bank's 2% target.

The continuing effect of the Iran war, mainly on energy and fuel costs, has fed through into the UK inflation rate. Millions of domestic energy customers are preparing for a sharp increase in prices in January.

The Bank of England last raised rates in August 2023.

Its base rate is the amount it charges other banks and building societies to borrow money, which affects what they charge their own customers for mortgages and the interest rate they pay on savings.

If the Bank rate rises, there would be an immediate effect on the 510,000 tracker mortgage-holders.

According to calculations by banking trade body UK Finance, a 0.25 percentage point rise would add £31 to monthly repayments for someone with a typical tracker home loan.

The 470,000 mortgage-holders on variable deals would have to wait for their lender's response to any Bank rate rise. Usually, a 0.25 percentage point rise would mean an extra £14 a month in repayments.

The situation for those on fixed deals is more complicated.

Although their monthly payments are not immediately changed by a rate move, their future deals are affected, and lenders have already "priced in" the expected rise when quoting new deals.

As of 4 November, the average two-year fixed residential mortgage rate was 5.96%, while the average five-year rate was 5.99%, according to financial information service Moneyfacts.

That means anyone coming off a five-year deal faces a much larger mortgage bill.

Broker L&C said average mortgage rates offered by the 10 biggest lenders suggested some borrowers could now be paying almost £5,000 more a year in repayments on a £200,000 mortgage over 25 years than those who secured a remortgage deal 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, hoping the rate will be lower even if the Bank rate rises in the coming months.

"The right choice ultimately depends on borrowers being confident they can stomach future rises. The devil is in the detail," said Rachel Springall from Moneyfacts.

The cost of some other new loans could also be affected by the Bank rate.

On the other hand, savers could see the interest rates offered to them improve if the Bank rate rises.

Ultimately, lenders - as well as policymakers at the Bank of England - must judge what may happen to the UK's economic outlook, which is closely tied to changes in international events.