🔔 Base Rate increases to 3%. Are we returning to the old normal?

Eight base rate rises in a row and the base rate is back up to 3% - its highest level in 14 years.

Base rate dropped to 3% in November 2008 in the midst of the financial crisis and although this is high in comparison to recent times, it’s still historically low. You’d have to go back to the 1950s in order to see interest rates persisting at such a low level. The average level of the Bank of England base rate since January 1975 is 9.16% and if you look back even further, the Bank rate had averaged 4.8% since the Bank of England was founded in 1694. As BBC Money Box presenter Paul Lewis recently penned in the Financial Times, ‘interest rates are returning to the old normal… it’s not so much back to the future as forward to the past’

How much higher will rates go?

Whilst in historical terms, an increase to 3% is not terribly significant, the speed at which it has reached this level and the latest hike of 0.75% is – it’s the largest rate rise in 30 years and an indication that the Bank of England recognises that inflation is more embedded than hoped.

That said, while inflation is now projected to increase to around 11% in the last quarter of 2022 – this is lower than previously expected, reflecting the impact that the Energy Price Guarantee (EPG) will have on household bills. And going forward, the MPC is predicting the Consumer Prices Index (CPI) inflation to start to fall back from early next year.

While all the members of the Monetary Policy Committee (MPC) voted for another rise at the latest MPC meeting on 3rd November, only seven of them wanted a 0.75% rise. One member voted for the base rate to rise by 0.50% and another voted for just 0.25%.

This suggests that we might be getting closer to the top of the rate increase cycle, although there is no doubt that there are still more to come – just perhaps not as high as the market is predicting. The latest prediction is that UK interest rates will peak at 5.25% in the third quarter of next year – down from a market expectation of 6%. But what will happen next?

Of course Bank of England predictions rarely come to fruition and there will inevitably be more financial shocks in the future, but the current consensus indicates that interest rates are heading back to where they should be, so we won’t go back to where we have been – the era of rock-bottom interest rates seems to be over, for the time being at least. Good news for savers!

What does this mean for savers right now?

Although the base rate has seen its biggest hike for 30 years, best buy activity has slowed markedly – especially the Fixed Term bonds. That said, there is still the occasional best buy that crops up – although blink and you might miss it! This slow down isn’t really a surprise; as mentioned above, there are plenty of indications that the markets had overegged the pudding and assumed that base rate would rise to a higher level than is likely to after all.

As a result of this marked slowdown, we could now have seen the fixed term bond market peak – at least for the time being. We are still expecting more base rate increases, but even that feels like the sentiment is changing and an end is in sight. So, if you are looking for a new home for your cash and don’t need access, now could be a prudent time to get it into a best buy fixed term bond.

Variable rate accounts should see some more improvements as further base rate rises occur, but will they get to the current fixed term bond levels?