Do You Have Rate Rage?

The Bank of England has raised its base rate for a fourth time. Here's how to take the strain off your finances.

As you've probably heard by now (unless you shun television, radio, newspapers and the internet), the Bank of England today raised its base rate by a quarter-point to 5.50% a year. This is the fourth time since last August that the Bank has hiked the base rate by 0.25%, taking it from 4.50% to 5.50% in just nine months.

The base rate was last at 5.50% six years ago, between April and May 2001. From that point, it fell steadily until it hit a 58-year low of 3.50% between July and November 2003. The Monetary Policy Committee then made four quarter-point hikes in 2004, followed by a quarter-point cut in August 2005 (which is now widely regarded as a mistake).

The latest round of rate rises is an attempt by the Bank to curb inflation, which is the tendency for the prices of goods and services to rise over time. Using the Retail Prices Index (RPI) measure, inflation is at a sixteen-year high, hitting 4.8% in March 2007. However, the Bank prefers to use the Consumer Prices Index (CPI), which hit 3.1% in March and is thus well over the Bank of England's target of 2%. Hence, the Bank will be monitoring price pressures very closely before deciding whether inflation is turning the corner, or if more rate hikes are needed.

Britain's biggest borrowing binge

Here's how our debt burden has soared since the base rate was last at this level:

As you can see, over the past six years, our mortgage debt has doubled, and our unsecured debt (including credit cards, personal loans and overdrafts) has risen by more than half (54%). Overall, personal debt is up by slightly over nine-tenths (91%).

So, what does this latest rate hike mean to British consumers?

In a nutshell, it should be a wake-up call for both borrowers and savers to shop around for better deals.

If you're a saver, we'd recommend hunting around for a better home for your nest egg, emergency fund or rainy-day money. For example, table-topping savings bank Icesave has already announced that it is to pass on the full 0.25% increase to its savers. This means that its superb no-strings savings account pays an impressive 5.95% a year on balances of £250+ from May 18th. Why put up with inferior savings rates when you can have the best?

If you're a borrower, you may be experiencing "rate rage" after the latest increase. Many overstretched homeowners will suffer as they face higher interest charges on their variable-rate debts. With the base rate at 5.50% a year, most major mortgage lenders will hike their standard variable rate to 7.50%+a year (the SVR is the rate paid by all borrowers who aren't enjoying a special-rate deal).

Given that Best Buy fixed, discounted and tracker rates are roughly 2% below this level, you could reduce your rage, and perhaps save upwards of £2,000 a year, by switching from your lender's SVR to a lower rate.

Finally, if your debts are getting on top of you, check out the advice on our popular Dealing with Debt and Living Below Your Means discussion boards. With the help of the Fool community, you could begin dynamiting your debts today!