We asked Emilie Bellet, founder and CEO of Vestpod and author of “You’re Not Broke, You’re Pre-Rich” to take over our blog to explain what the recent Bank of England bank rate rise means for your finances.

Despite falling back slightly in March, inflation remains high at 8.7%. The base interest rate (also known as the bank rate) has risen from 0.1% in December 2021 to its current level of 5% in order to tackle the rising cost of living.

While it's important to filter out financial noise, certain news, like interest rate adjustments, hold significance as they directly influence your money management and financial well-being.

Let’s talk about what all this means for you in practice, and how you can best prepare yourself and protect your finances.

What is the bank rate?

'Bank Rate' is the single most important interest rate in the UK. The Bank of England set this interest rate. It’s also referred to as the ‘Bank of England base rate’ or even just ‘the interest rate’.

The bank rate set by the Bank of England acts as a benchmark for financial institutions. Commercial banks have the option to borrow money from the central bank, or they can choose to invest their funds with the central bank at the prevailing interest rate.

This bank rate serves as a key tool for the central bank to influence the overall economy. The bank rate affects other interest rates in the UK's economy. E.g. the lending and savings rates offered by high-street banks and building societies.

The interest rate tells you how high the cost of borrowing is or how high the rewards are for saving.

What is the role of the Bank of England?

Central banks, like The Bank of England, play a vital role in maintaining economic and financial stability. They use monetary policy to influence economic conditions.

One of their responsibilities is ensuring low and stable inflation, aiming for around 2% in the UK vs the current 10.1%. They use interest rate adjustments as a tool to control inflation and bring it back to the target level.

When interest rates fluctuate, what exactly are the repercussions?

When the Bank of England raises interest rates, it results in increased borrowing costs and higher mortgage and debt payments.

On the positive side, savers may potentially benefit from higher interest on their savings.

When banks make it more expensive to borrow money, it generally means that businesses and individuals have less available to spend, which reduces demand for goods and services.

A decline in demand for goods and services ideally translates to lower prices, thus reducing inflation.

What’s the impact of higher interest rates on your finances?

Debt: When interest rates go up, it means you might have to pay more each month on your mortgage, credit cards, or loans. This can create financial strain and put pressure on your budget. If you see rates going up, it’s a good time to try and reduce all debt linked to variable rates since you’ll be instantly impacted by rate hikes. The primary debts to focus on are credit card balances and variable rate mortgages.

Savings: On the bright side, when interest rates are higher, it could mean you can earn more on your savings. But remember that it’s still important to shop around and find the best savings options to make the most of your money. Note that in some cases, financial institutions may not pass on the full benefits of higher interest rates to savers.

Interest rates are expected to continue to rise. What can you do now?

● Don’t panic or make hasty decisions

● Review your budget and identify areas where you can cut back on spending to accommodate higher payments

● Prioritise debts based on interest rates and consider paying off high-interest debts first (these are usually things like credit cards)

● Call or contact your lenders if you feel like you might struggle to make higher payments or need to put in place a repayment plan. If you’re struggling to make ends meet, debt charities are always amazing – check out Step Change or Citizens Advice for impartial advice

● Explore fixed-rate options to lock in a consistent interest rate and protect yourself from future rate hikes

● The interest rate rise is also set to affect first-time buyers who may now be unable to get onto the housing ladder due to unaffordable mortgage rates. While tracker and variable rates are likely to go up in response to the rise, fixed rates are less certain. Speak to a broker before making any changes to your mortgage

● Regularly monitor changes in interest rates and consider different savings options for better returns

● Seek advice from a financial advisor or a mortgage specialist for personalised guidance

● Take care of your mental health and remember to break things down into small chunks. We tend to get stressed out and procrastinate when we’re overwhelmed, so try and reduce that to a minimum. Speak to a professional if you feel you need the support. There are plenty of free resources out there to support you if you need it

It’s also important to keep in mind that current savings rates are still low compared to inflation. While cash may feel secure in the short term, its value erodes over time, leading to a loss in purchasing power, especially when considering long-term goals like retirement planning. That’s why investing for the long-term is always a good avenue to explore.

The next decision on interest rates by the Bank of England will take place on 22 June 2023. In the meantime, don’t hesitate to reach out for support, professional advice, or conduct your own research into how to best weather the inflation storm and protect your money.

We hope you’ve found these tips useful. Vestpod offers a range of podcasts (The Wallet), free content and webinars, as well as more in-depth bootcamps and courses that help you take charge of your finances, alleviate money-related stress and get started investing.

You can also find more money tips on the Smart Money People social media channels:

This blog is intended to provide guidance on interest rates rather than specific advice. If you need financial advice it's a good idea to contact a money management organisation for further help. Click here to read our blog that lists what support is available if you need it.