How will Brexit affect interest rates?

How will interest rates be affected when Britain leaves the EU?

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Brexit is likely to have a large impact on the UK, and one area that may be affected is the interest rates offered by UK banks. Fluctuations in the Bank of England base rate could have a knock-on effect on mortgages, loans, credit cards, and savings products

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The Bank of England base rate (or “bank rate”) is set by the bank’s monetary policy committee (MPC) which meets each month to decide if the rate should rise, fall or stay the same. One of the MPC’s tasks is to target inflation of 2%, with base rate rises used as a brake on the economy.

The base rate is used as a benchmark for interest rates generally, and also affects the interest paid on variable rate mortgages and the interest earned on variable rate savings accounts.

It’s now 10 years since the Bank of England cut the base rate to 0.5% as part of emergency measures during the financial crisis.

In the wake of the Brexit vote the rate was cut to 0.25%, remaining at that level from August 2016 to November 2017 when it went back up to 0.5%.

Another rise in August 2018 took the base rate to 0.75%, where it still stands. This rate is very low in historical terms.

It’s very difficult to predict what effect Brexit will have on interest rates. Two members of the MPC, Silvana Tenreyro and Gertjan Vlieghe, have suggested the committee might cut interest rates in the event of a no-deal Brexit.

But Bank of England governor Mark Carney and deputy governor Sir Dave Ramsden (who both sit on the committee) have both indicated the potential need for rate increases if Britain leaves the EU without a deal.

The Bank of England’s official position is that the MPC response to Brexit would not be automatic and could be in either direction. So all of this basically means we don’t know what’s going to happen.

Outside of the MPC, most experts reckon we’ll see one base rate rise sometime in 2019, whatever happens, pushing the rate to 1%.

Higher interest rates would mean those on variable rate mortgages, such as trackers, would face higher repayments. A 0.25% rate rise would cost about £12 extra a month on a £100,000 mortgage, and about £25 more on a £200,000 mortgage.

If you have a fixed rate mortgage, you are protected from rate rises until the fixed term on your deal ends (although you won’t benefit from any fall in the base rate either).

Most fixed deals revert to a lender’s standard variable rate (SVR) at the end of the fixed period, which usually acts as a prompt to remortgage to a better rate – though if interest rates rise, you may find this is more expensive than your previous fixed rate.

Both lenders’ SVRs, and interest rates on mortgage products, are influenced by the base rate.

If you are on your lender’s SVR, it’s a good idea to take a look and see if you can move to a more competitive deal. If you’re concerned about interest rates increasing, it can make sense to choose a fixed rate deal as your monthly repayments will remain the same for the duration of the fixed term.

You can use our base rate calculator to work out how much a rate increase could affect your mortgage payments.

The situation is less clear cut with loans and credit cards. Historical trends suggest borrowers with unsecured debts are unlikely to see the costs of their debts change in the short term, whether interest rates go up or down. The typical credit card APR has stood at about 18% for several years now, and doesn’t seem to be strongly influenced by the base rate.

In theory, a rise in interest rates would mean better returns for savers. However, previous interest rate rises have seen little change in the savings market. Banks are very good at passing on increases in interest rates to people on variable rate mortgages, but not so quick to pass on the increase to their savers.

When interest rates went up to 0.5% in November 2017, statistics show that almost half of all savings accounts saw no rate rise at all.

The best thing you can do as a saver is to keep an eye on your savings rate and regularly check to see whether you can move your money to something more competitive. You can compare savings accounts with MoneySuperMarket.

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