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

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

Most analysts are predicting an rise from 3.75% to 4% in a move that would increase the cost of borrowing for individuals and businesses, but boost savers.

The Bank rate has fallen from its 2023-24 peak of 5.25%, although the Bank's Monetary Policy Committee (MPC) has left the rate unchanged at its last six meetings.

Rising inflation, driven primarily by the cost of petrol and diesel, will push policymakers into an interest rate hike, analysts suggest.

The announcement will be made by the Bank at 12:00 GMT on Thursday.

Close attention will also be paid to any hints from the MPC on the future direction 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 of a few years ago but has been heading back up and is expected to go higher.

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 ongoing impact of the Iran war, primarily on the cost of energy and fuel, has filtered through to the UK inflation rate. Millions of domestic energy customers are braced for a hefty rise in prices in January.

The Bank of England last raised rates in August 2023.

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

Were the Bank rate to rise, there would be an immediate impact on the 510,000 tracker mortgage-holders.

A 0.25 percentage point rise would mean a £31 increase in monthly repayments for someone with a typical tracker home loan, according to calculations by banking trade body UK Finance.

The 470,000 mortgage-holders on variable deals would need to wait for their lender's reaction to any Bank rate rise. Typically, a 0.25 percentage point rise would mean a £14 increase per month in repayments.

The picture for those on fixed deals is more nuanced.

While their monthly payments are not immediately affected by a rate change, their future deals are, and lenders have already "priced in" the expected rate 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 stood at 5.99%, according to financial information service Moneyfacts.

It means anyone rolling off a five-year deal faces a much bigger mortgage bill.

Broker L&C said that average mortgage rates offered by the 10 biggest lenders suggested some borrowers now faced paying almost £5,000 more each 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 prompted some people to consider choosing trackers, in the hope that the rate would 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 be influenced by the Bank rate.

Savers, on the flipside, could see the interest rates offered to them improve in light of any rise in the Bank rate.

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