Inflation and Interest Rate Rises: What’s Going On?

, by Matt Stevens

Although in September 2023 we’ve seen no further movement to the Bank of England (BoE) base rate, meaning it stands at 5.25%, this doesn’t diminish the fact that the base rate has seen 14 consecutive increases since December 2021 when it stood at 0.1%.

This has understandably been a worrying period for both current and prospective homeowners, due to the inextricable link between the Bank Rate and mortgage interest rates. When the BoE raises its interest rate, the cost of borrowing from mortgage lenders typically increases.

The reason the Bank of England has repeatedly given is that interest rate rises are happening in order to ensure that inflation in the UK comes down. So, what exactly is the situation with inflation and interest rate rises? In this post we’ll help to inform you on the matter.

How is inflation measured?

Inflation can be defined as the rise in the cost of goods and services. Furthermore, inflation applies to a wide range of items, including food, general appliances, phone services, and utility bills.

Inflation is measured by comparing the prices of these goods and services over a period of time. The Office for National Statistics calculates the Consumer Price Index (CPI) based on gradual price increases, which is then monitored by the Bank of England.

How do higher interest rates bring down inflation?

Higher interest rates increase the cost of borrowing, prompting individuals to spend less and save more. This reduced spending decreases overall demand for goods and services, which in turn leads to a slower rate of price inflation and vice versa.

For instance, in 2021, record-low interest rates incentivised people to secure mortgages due to their affordability. Conversely, low interest rates on savings accounts offered little motivation to retain money in them. This led to a housing market boom, directly impacting property prices and the sharp rise of mortgage lender interest rates we’re currently seeing. Albeit, the BoE does account for various other factors when setting the base rate such as how many people are in work and how the UK economy is performing.

Will interest rates fall in 2024?

It’s difficult to say what interest rates will look like in the next year because, as mentioned, this depends on a few variables. However, the Bank of England has said that inflation is still too high for them to bring down interest rates. Followingly, interest rates will remain high and might even increase further until inflation is back to normal, due to how quickly the cost of living has risen.

How will inflation and interest rate changes affect my mortgage?

If you’re on a standard variable rate mortgage, then any changes in inflation, and consequently the BoE base rate, may be reflected in the cost of your monthly repayments. This is particularly the case if you’re on tracker mortgage, which has your charged interest rate dictated by the Bank Rate.

Considering that the price of almost everything has increased, it’s understandable that such changes can make it hard to manage your finances. Although, there are many ways to reduce the cost of your mortgage payments. For example it could be worth switching over to a fixed rate mortgage to combat any base rate increases.

Mortgage Switch Calculator

Ultimately, the right decision depends on your specific financial circumstances, and it’s strongly recommended that you seek advice from an expert mortgage broker before coming to a conclusion.

We at The Mortgage Genie are equipped with the knowledge and experience required to provide you with cost-saving mortgage solutions. If you want details on how we can help you amid inflation and interest rate rises, then be sure to contact us at 01915809890 today. And why not see how much you could borrow up to today by using our mortgage calculator?

Company Information

The Mortgage Genie Limited is Registered in England and Wales with Company Number 9803176. The Mortgage Genie Limited is an Appointed Representative of PRIMIS Mortgage Network, a trading name of First Complete Ltd. First Complete Ltd is authorised and regulated by the Financial Conduct Authority. Most Buy-to-Let Mortgages are not regulated by the Financial Conduct Authority. The guidance contained within this website is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK.


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