Bank of England raises rates to 4% for first time in over three years — what it means for you

The Bank of England has raised its base rate by a quarter of a percentage point to 4%, its first increase in more than three years, as the Monetary Policy Committee moves to contain inflation it fears could be prolonged by the ongoing US and Israel war with Iran and the surge in energy prices that has followed.

The move ends a period of gradual cuts that had brought the Bank Rate down from a high of 5.25% to 3.75% — a level it had held since August 2023. The immediate losers are the roughly 510,000 UK homeowners on tracker mortgages, whose monthly payments will rise automatically in line with the Bank Rate. Those on standard variable rate deals are also likely to feel the pinch, though the timing depends on how quickly their lender acts.

According to banking trade body UK Finance, tracker mortgage holders can expect monthly payments to rise by around £31, while those on variable deals face an increase of around £14. The vast majority of UK mortgage holders — 87% — are on fixed-rate deals and will see no immediate change. But those deals do not last forever: UK Finance analysis suggests around 2.3 million fixed-rate deals are due to expire in 2027, and anyone remortgaging will face the new, higher rate environment.

The Bank of England acknowledged that raising rates cannot directly address inflation driven by foreign conflict and energy markets. It said a rate rise 'can't stop the impact of these kinds of things' but 'can slow down new causes of inflation that follow on from these shocks,' according to Metro. The Bank also cautions that a rate rise can take as long as two years to filter through to lower inflation — meaning the squeeze on household budgets comes well before any relief at the till.

There is one group that stands to benefit: savers. When the Bank Rate rises, banks typically offer better returns on savings accounts and deposit products, though the gains are not automatic — shoppers are advised to compare rates actively. Sites such as Money Saving Expert and price comparison providers can help track down the best available deals, according to Metro.

The rate rise does not exist in isolation. Across the Atlantic, the US Federal Reserve raised rates by 25 basis points last month — its first hike since 2023 — bringing its benchmark to a range of 3.75% to 4%, according to CNBC. The Fed is widely expected to hold rates at its upcoming October meeting, with fed funds futures pricing in less than a 10% chance of another quarter-point rise at that meeting, according to CME Group's FedWatch tool. Even so, nearly 75% of market participants expect at least one further hike by year-end, CNBC reported.

Inflation is still the No. 1 problem in the U.S. economy, and there are a lot of signs it is getting more broad-based. For consumers, it means really high borrowing costs for the foreseeable future.— Heather Long, Chief Economist, Navy Federal Credit Union

In the US, the effects of elevated rates are spreading across multiple types of borrowing. The average interest rate on a new credit card offer has reached 23.96%, according to LendingTree data cited by CNBC. The average rate on a 30-year fixed mortgage is close to 7.4%, driven largely by the yield on the 10-year US Treasury, which has been near 5%, according to Mortgage News Daily figures cited by CNBC. Auto loan costs are also elevated, with many buyers extending repayment terms to manage affordability, according to Edmunds data cited by CNBC.

Higher longer-term rates are doing more damage to consumer wallets, as they've risen more than short-term rates, and are weighing heavily on refinancing activity, homebuying and vehicle sales.— Mark Zandi, Chief Economist, Moody's

The Bank of England sets its rate eight times a year. The last time it raised rates, the trigger was Russia's invasion of Ukraine and the energy price spike that followed. The mechanism is the same now: higher rates make borrowing more expensive, reducing consumer spending, which in theory reduces demand and slows price rises — even if the original cause of inflation is a geopolitical shock beyond the Bank's control. Falling inflation, it is worth noting, does not mean falling prices; it means prices are rising more slowly.

Why it matters — Whether you have a mortgage, savings, or are planning to borrow, the Bank of England's first rate rise in over three years directly changes what you pay and earn — and signals that borrowing costs could stay elevated for years as policymakers fight inflation tied to global energy shocks.

Reported by theguardian.com, metro.co.uk, cnbc.com