Bank of England raises base rate

Last week's Bank Of England MPC decision to raise the base rate by 0.25% to 0.50%, the first rise in a decade, has certainly got the chattering classes going but is it quite as dramatic as the media would have us believe? The industry has been expecting this and most banks and building societies factored it into their rates currently on offer weeks ago.

If you are currently on a fixed rate, or you’re going through an application for a fixed rate product, this will not affect you at all until your product ends.

For those on tracker or other variable rates, payments will return to what you were paying in the summer of 2016.

So what's changed? To understand this, we need to go back to the days when Obama was president-elect and when Britain had a Labour government. The base rate was slashed from over 5% down to 0.50% in just a few months, between the autumn of 2008 and spring 2009, in the wake of the global credit crunch; it was designed to help private and business borrowers start spending again to help boost the economy. Savers, though, saw the value of their wealth shrink overnight.

In the years that followed, the UK economy steadily grew but inflation stayed low and that allowed the MPC to keep rates low and help to encourage growth while spending was in check. After the UK's narrow vote to leave the European Union in June 2016, the economic goalposts moved. The BOE's immediate concern was to try and keep stimulus for businesses and borrowers alike and a swift cut of the rate to 0.25% (a new record low) followed in August 2016. The subsequent fall in the value of the pound has made imports more expensive and pushed up retail prices and, in turn, inflation. The BOE acted (after a couple of months of posturing) by doing the only thing it could, raise the rate back up to 0.50% to try and slow down the sharp rise in prices. Time will tell if it works or if more rises are needed.