Clearest indication yet of when rates will increase.
Base Rate may rise as early as the New Year, according to the governor of the Bank of England.
In a speech last night, Mark Carney indicated that Base Rate could go up at the turn of the year, pointing to the strong momentum of the British economy.
However, don't expect rates to rise quickly - Carney said that he thought they would reach "about half as high as historical averages” over the next three years.
Since the Bank of England’s inception, rates have averaged around 4.5% so this could mean rates rise to around 2%.
UK interest rates
The Bank of England Base Rate has been held at 0.5% for over six years, as the UK has slowly recovered from the financial crisis.
Many experts had predicted that the rise would come at the beginning of 2015, but that failed to happen.
Carney’s fresh guidance suggests we will see the rise at the turn of 2016, but he warned: “The actual path almost certainly will not be mechanical, linear or pre-determined. First and foremost, shocks to the economy could easily adjust the timing and magnitude of interest rate increases.”
The governor said the Monetary Policy Committee, which decides each month what happens to interest rates, will “have to feel its way as it goes”.
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What will a Base Rate rise mean for borrowers?
Borrowers have been enjoying record low interest rates on things like loans and mortgages, thanks to the low Base Rate.
But once the Base Rate starts to creep up, borrowing is likely to get more expensive as banks pass on the increased cost.
Carney said: “Over a half of UK mortgagors would pay higher rates in a year’s time, and close to three-quarters of mortgagors in two years’ time, were interest rates to evolve according to current market rate expectations.”
People on variable rate tracker mortgages, especially those linked directly to the Base Rate, will be the first to feel the impact of a change. But those that lock into fixed rate mortgages will be shielded from the change for as long as their deal lasts.
So anyone on the hunt for a mortgage now should consider going for a fixed rate deal to guarantee repayments don’t rise.
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What will a Base Rate rise mean for savers?
Savers have suffered from poor returns on savings accounts for years now.
But once rates start to rise, savers could feel the benefit with banks starting to offer better returns for their cash.
So while at the moment fixed rate bonds, especially longer terms ones, look tempting, it might be worth going for more short-term deals so that you can be quick to take advantage when the tide turns.