Keep control of your own interest rates - what to do after the base rate rise

The increase in the Bank of England's base rate takes it to its highest level for five years. What was behind the rise and what should you be doing about it as a borrower? You're less likely to be a saver - statistically the majority of us are in debt. All you have to do as a saver is keep an eye on the interest rate you get and switch to a higher one if you can.

Some institutions have already acted to pass on the higher return to savers. First off the mark on Thursday with a statement just two minutes after the base rate rise had been announced, Icesave said it would increase the interest rate on its easy access online savings accounts to 5.45% AER, passing on the rate rise in full effective from 15 November.

Which is the best savings account for you? Let Moneyextra guide you to the right choice with our comparison service.

However, the rest of us may have to do a bit of belt tightening.

What's behind the rate rise?

The rate rise came, as had been widely expected and as the majority of rate changes have in recent years, in a month when the Banks quarterly Inflation Report is due to be published. The Monetary Policy committee cited a fourth consecutive quarter of solid growth and volatile household spending. Officially, the strength of the housing market was not a direct consideration but it was certainly the elephant in the room!

In fact, the financial markets are still pricing in another increase to 5.25% in February. Why? Because as Richard Woolnough, manager of the M&G Corporate Bond Fund points out, real interest rates (interest costs minus inflation), at 2.6%, "are roughly the same level as in 2002... No wonder the housing market continues to plough ahead, money supply growth is hitting new records and inflation is close to a 10-year high."

Paul Niven, Head of Asset Allocation at F&C Investments noted, "...five consecutive monthly Consumer Price Index readings above the critical 2% target," adding that a mix of "above trend growth and rising inflation was too strong to justify rates staying below 5%."

August's quarter point rise, the first change in 12 months and the first rise in two years had little impact on house prices. Milan Khatri, chief economist at the Royal Institution of Chartered Surveyors commented, "House price figures from the Halifax confirm that the market has shrugged off the August interest rate hike with property price inflation at close to a double digit page, more than twice that of wages."

The base rate rise came hard on the heels of controversy over some mortgage lenders' willingness to lend five and even up to seven times income multiples. Michael Coogan, director general of the Council of Mortgage Lenders, said of such mortgages, "These will only be within the grasp of a select group of borrowers who are able to pass lenders stringent affordability and credit checks."

10 November 2006 © Moneyextra.com

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