The Bank of England Raised Rates to 4%. What It Means for Mortgages, Savings and UK Shares

The Bank of England has raised Bank Rate by a quarter point to 4%, its first rise in more than three years. The reason is energy: the Iran war is in its ninth month, oil and gas have kept climbing, and inflation is 3.5% against a 2% target. For about one mortgage holder in eight, the cost arrives almost at once: roughly £14 a month more for every £100,000 on a tracker. For savers, rates should drift up, slowly. For shares, the textbook says banks win and housebuilders lose, but the last cycle shows the real pattern is messier than that.

Watch it play outA quarter-point rise hits one mortgage in eight now; the bigger bill comes later

Bank Rate, the rate the Bank of England pays on money banks hold with it, had been 3.75% for almost a year.

The Bank lifted it a quarter point to 4%, its first rise in more than three years.

Picture every UK mortgage holder as 100 dots.

About 13 are on trackers or their lender's standard variable rate. Their payments can rise almost at once.

On a typical tracker the rise adds about £31 a month.

The other 87 are on fixed deals and feel nothing yet. Their test comes when the fix ends, and about 800,000 deals at 3% or less end each year.

Replay

The vote was 8 to 1. Eight members wanted a quarter point. Catherine Mann wanted half a point, to 4.25%, calling the bigger move "good policy" given the risk that inflation spreads into wages and prices. Governor Andrew Bailey said the rise shouldn't be seen as "the first in an inevitable long sequence of hikes", but added that "unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase."

Why the Bank raised rates now

The UK imports more energy than it produces, so a war that pushes up oil and gas feeds straight into prices here. The Bank's minutes say Brent crude averaged $108 a barrel and UK gas 216p a therm in the run-up to the decision, 38% and 81% above where they were at the Bank's previous forecast three months earlier. Energy alone added about 1 percentage point to inflation, mostly through fuel.

The Bank now expects CPI inflation, the official measure of how fast prices rise, to climb to around 5% by the middle of next year, more than twice the target. It doesn't see inflation back at 2% for nearly two years. So far there is "limited evidence of knock-on effects on other prices and wages," the minutes say, because many firms are absorbing costs through thinner margins, hedging and fixed contracts. The rise is meant to keep it that way. Mann's argument was that the economy has already crossed into a regime of high inflation and a tight labour market, where waiting is riskier.

The decision in four numbers

4.00%Bank RateUp from 3.75%

8 to 1VoteMann wanted 4.25%

3.5%Latest CPI inflationTarget is 2%

About 5%Inflation forecastBy the middle of next year

The committee is split on what comes next. Deputy Governor Clare Lombardelli said "there is likely to be a case for a further increase in rates in the near term." Huw Pill, the chief economist, said "a single 25-basis point hike is unlikely to be sufficient." At the other end, Alan Taylor called it a "one-for-now" insurance hike and said "this is not the start of a hiking cycle." Bailey sat in between: he can "see the argument for a further increase," but wants to be guided by energy prices and inflation.

This is a sharp turn. Bank Rate was cut six times from its peak, the last time almost a year ago, and then held at six meetings in a row. Two months ago, about 90% of economists polled expected no change for the rest of the year.

Bank Rate turns up again after six cuts from the peak

0123456%5 yrs ago4 yrs3 yrs2½ yrs2 yrs1 yrNowPandemic low 0.1%Peak 5.25% after 14 risesUp to 4%4.00%Bank Rate5 yrs ago0.10%4½ yrs1.00%4 yrs3.00%3½ yrs4.50%3 yrs5.25%2½ yrs5.25%2 yrs4.75%18 mths4.25%1 yr4.00%6 mths3.75%Now4.00%

What the rate rise means for your mortgage

It depends almost entirely on which kind of mortgage you have. According to the BBC's breakdown, just under a third of households have a mortgage, and 87% of mortgage customers are on fixed deals. About 500,000 homeowners have a tracker, whose rate is set at a fixed margin above Bank Rate, so it rises by the full quarter point, usually from the next payment. That adds roughly £31 a month on a typical loan. Another 500,000 are on a standard variable rate (SVR), the rate a lender charges once a deal ends. Lenders choose whether to pass a rise on; if they do, the typical increase is about £14 a month.

Here is the maths for a repayment tracker with 25 years left, moving from Moneyfacts' average two-year tracker rate of 4.68% to 4.93%:

On an interest-only tracker the full extra interest lands on the payment: £20.83 a month per £100,000. If you are on an SVR, Moneyfacts puts the average at 7.13%. Switching a £200,000 loan from 7.13% to the average two-year fix of 5.97% would cut the payment from about £1,430 to £1,285, a saving of about £145 a month.

If your fixed rate is ending

Most people won't notice this rise until their fix ends, and for many the jump then will be far bigger than a quarter point. The BBC estimates that about 800,000 fixed deals at 3% or below are due to end each year on average until the end of next year. Moneyfacts' average two-year fix is now 5.97% and the five-year fix 6.00%. The two-year fix is up from 4.83% at the start of the year and is at its highest in nearly three years.

Watch it play outEnding a 3% fix costs about 12 times more than the rate rise itself

Take a £200,000 repayment mortgage with 25 years left, fixed at 3%: £948 a month.

The fix ends. Moneyfacts' average five-year fix is now 6.00%.

Same loan, same term: £1,289 a month.

That is £340 a month more, about £4,080 a year.

The quarter-point rise on a £200,000 tracker adds £29. For people leaving cheap fixes, the old deal ending matters far more than this week's decision.

Replay

The useful detail for anyone shopping for a fix: lenders priced this rise in before it happened. Fixed rates follow swap rates, the market rates lenders pay to lock in funding, and those had already moved. The big five lenders' cheapest two-year fixes were 0.44 points higher than two months earlier, and the Bank's own minutes put the rise in two-year mortgage rates over that period at nearly half a point. Rachel Springall of Moneyfacts said some lenders "may have overcompensated" and fixes could ease slightly if the Bank signals a calmer path, though "most of the damage is unlikely to unwind entirely." So the decision itself doesn't push fixed rates up. What moves them from here is oil, inflation figures and the market's guess about the next few meetings.

What it means for savings

Savers gain, but slowly. Banks raise deposit rates later and by less than they raise loan rates, which is exactly why their margins widen. Before the decision, Moneyfacts' averages were 2.58% for an easy-access account, 2.79% for an easy-access cash ISA and 4.48% for a one-year fixed bond.

Easy-access savings pay less than inflation; a one-year fix pays more

Easy-access account2.58%

Easy-access cash ISA2.79%

CPI inflation3.50%

One-year fixed bond4.48%

Average rates before the decision. On £10,000, the gap between easy access and a one-year fix is about £190 a year before tax.

On £10,000, an average easy-access account pays about £258 a year, while prices are rising 3.5%, so the money loses about £92 of buying power. A one-year fix at 4.48% pays about £448 and stays ahead of the current inflation rate, though not of the 5% the Bank expects by the middle of next year. If you hold cash you won't need for a year, the average easy-access rate is the costly place to leave it.

Gilts and sterling: the market expects more

Gilts are UK government bonds, and their yields show where investors think rates are heading. After the decision the two-year gilt yield rose to about 4.78% and the 10-year to about 5.15%. A two-year yield well above the new 4% Bank Rate means the market expects further rises. Market pricing points to three more quarter-point rises next year, more than most economists expect; Bailey put the gap down to traders insuring against another energy spike. The Bank's own survey of market participants has 4.25% pencilled in two meetings from now.

The odds for the very next meeting are much lower, though. Traders now see about a 25% chance of another rise at the next decision, LSEG data showed, against near certainty for this one beforehand. Sterling barely moved, at about $1.35, because the rise was fully expected.

For a share investor, the 10-year yield matters most. At about 5%, a risk-free gilt competes directly with dividend shares, property and utilities, and it sets the discount rate used to value long-dated cash flows. Every extra rise the market pencils in puts a little more pressure on those parts of the market.

Which UK shares gain and lose from higher rates

The textbook goes like this. Banks earn more on the gap between what they charge borrowers and what they pay savers, so higher rates help them. Housebuilders, property companies and utilities borrow heavily or depend on cheap mortgages, so they suffer. Domestic mid-caps in the FTSE 250 feel a squeeze on UK consumers; the FTSE 100's global earners, who make most of their money in dollars, care more about the world economy and the pound.

The last time rates rose, the textbook got the losers right and the winners wrong. Here is how share prices moved from the day before the first of the 14 rises to the day of the last, using Yahoo Finance prices:

During the last 14 rate rises, housebuilders fell hardest and banks went nowhere

FTSE 100+5.0%

NatWest+1.1%

SSE+0.4%

Lloyds−3.2%

United Utilities−13.8%

Landsec−14.3%

Barclays−15.5%

FTSE 250−16.0%

Taylor Wimpey−28.2%

British Land−35.2%

Barratt Redrow−37.1%

Persimmon−58.7%

Share price change only, dividends excluded, from the day before the first rise to the day of the last, as Bank Rate went from 0.1% to 5.25%.

The pattern then reversed in an odd way during the six cuts that followed:

Banks soared while rates were falling and housebuilders kept falling even as mortgages got cheaper. The lesson: what matters for these shares is how high rates stay for how long, not which way the next quarter point goes. Here is what that means sector by sector.

Banks: higher for longer is what pays

A bank's net interest margin (NIM) is the gap between the rate it earns on loans and investments and the rate it pays on deposits. UK banks don't feel a rate rise mainly through new loans. They feel it through the structural hedge: a big book of fixed-rate swaps that locks in income on current accounts and other deposits that pay little or no interest, rolled over a few years at a time. Lloyds' hedge earns about 3% on average, well below current market rates, so each maturing slice gets reinvested higher. That pushed its margin to 3.25% last quarter, with the hedge adding 9 basis points (0.09 points) while deposit and mortgage competition took off 5.

That is our reading of the table. During the rises, the hedges were still full of swaps locked in near zero, so the benefit came slowly and the shares went nowhere. During the cuts, rates stayed far above those old levels, each maturing slice was reinvested higher, and hedge income kept compounding. A rise to 4% that markets expect to go further extends that runway. Bank shares rose on the morning of the decision: the sector gained 1.3%, and Barclays, Lloyds, HSBC and Standard Chartered were up 1.5% to 2.5%.

There is a catch. About a week before the decision, Chancellor John Healey's first Budget doubled the bank surcharge, the extra corporation tax banks pay on profits above £100m, from 3% to 6% for 15 months to fund help with energy bills. The rate rise hands some of that back through higher hedge income, but how much depends on each bank's deposit base and hedge, and the answer differs a lot between Lloyds, NatWest and Barclays. Our member issue works through the net maths bank by bank: extra surcharge against extra interest income, per share.

Housebuilders: the most exposed

Housebuilders depend on buyers who can afford the monthly payment, and the two-year fix is up more than a full point since the start of the year. The Bank also expects real household income from work to fall this year and next. Persimmon, Barratt Redrow and Taylor Wimpey lost 28% to 59% during the last round of rises and have not recovered since, because margins collapsed as build costs rose and buyers needed incentives. A rise the market reads as "one and done" can still spark relief rallies, but the sector needs falling mortgage rates and better margins together. Our housebuilder issue covers which builders can survive higher-for-longer.

Property and REITs

Real estate investment trusts (REITs) are property companies that pay out most of their rental income. Their property values are set partly by comparing rental yields with gilt yields: when the 10-year gilt yields 5%, buyers demand higher rental yields, which means lower property prices. Most also carry debt that has to be refinanced. British Land fell 35% and Landsec 14% during the last round of rises. With the 10-year gilt above 5% already, a single quarter point changes little, but a run of further rises would weigh on valuations again.

Utilities and other high-debt companies

Water and power companies are regulated, so their revenue is predictable, which makes their shares trade a bit like bonds. They also borrow heavily to fund investment. United Utilities fell 14% during the last round of rises, while SSE held flat. Any company with a lot of floating-rate or soon-to-mature debt pays more interest as rates rise. Check net debt against operating profit before assuming a "defensive" share is safe.

FTSE 100 dollar earners vs the domestic FTSE 250

The biggest gap in the last cycle was between the two main indices: the FTSE 100 rose 5% while the FTSE 250 fell 16%. The FTSE 100 is dominated by oil, mining and drug companies that earn in dollars, and the oil and mining giants gained from the energy spike. The mid-caps lean on UK shoppers, UK property and UK borrowing costs.

This time the market went into the decision in a better mood. The FTSE 250 rose 0.6% to a record high on the morning of the decision, and the FTSE 100 opened at 10,928.69, within reach of 11,000 and up about 9.9% this year. One reason for the calm is oil, which is falling sharply (more below). Lower oil hurts BP and Shell but helps consumers and the domestic companies that sell to them. For more on how the two indices compare over the long run, see our FTSE 100 vs S&P 500 study.

How higher-for-longer rates tend to land on UK shares

Tend to gain

• Banks with large deposit books and structural hedges (Lloyds, NatWest, Barclays)
• Savers and cash-rich companies earning more on cash
• Dollar earners, if the pound stays steady

vs

Tend to lose

• Housebuilders: buyers' mortgages cost more
• Property companies and REITs: gilt yields compete with rents
• Utilities and other heavily indebted firms: refinancing costs rise
• Domestic mid-caps that depend on UK spending

Oil may take the pressure off

The Bank's forecast was built on Brent averaging about $108. In the same week, oil fell hard. The Democrats won both chambers of Congress in the US midterms, and investors bet that would hasten an end to the Iran war. Brent fell more than 8% in a single session and traded around $94 a barrel the day of the decision, about 13% below the level the Bank had used. President Trump said he had no immediate plans to escalate strikes on Iran.

If that holds, the case for a second rise weakens, which is what the drop in odds for the next meeting reflects. If talks stall and oil rebounds, the hawks on the committee already have their argument written.

What to watch next

Three things decide whether 4% is the top

1. This weekOil slides on hopes the Iran war endsBrent near $94, against the $108 in the Bank's forecast
2. Next CPI printMonthly inflation figuresLast reading 3.5%; the Bank expects a climb toward 5%
3. In six weeksNext rate decisionMarkets put the chance of another rise at about 25%
4. Two meetings outMarket survey expects 4.25%
5. Middle of next yearBank's forecast inflation peakAround 5%

1. Oil and the Iran talks. Brent below $100 for weeks would leave the Bank's inflation forecast looking too high. A collapse in talks would push it back toward the $108 the forecast assumed, or toward the roughly $130 peak in the Bank's bad-case scenario.
2. The next inflation figures. The Bank says underlying inflation has stopped falling. A rise driven only by fuel is the expected part; services inflation and pay growth picking up as well is what would make a second rise likely.
3. The next rate decision, in six weeks. Watch the vote. If more members join Mann, or if Alan Taylor and Swati Dhingra, who want firmer evidence of knock-on effects before going further, start backing a second rise, another one is likely.

Caveats

The mortgage figures use average rates and a 25-year repayment term; your lender's rate, term and fees will differ. The sector table shows share prices only, without dividends, so it understates total returns for high-yield shares such as utilities and banks. Past cycles also mixed in other shocks, such as the energy spike, the gilt crisis and bank failures abroad during the rises.

Our read

The quarter point itself is small: £14 a month per £100,000 on a tracker, and fixed rates had already moved before the decision. The real household squeeze is the 800,000 or so cheap fixes ending each year into rates near 6%, and that stays true whether the Bank stops at 4% or goes to 4.5%.

For investors, the last cycle's lesson is that the level and duration of rates matter more than the direction of the next move. Banks are the clearest winners from rates staying near 4% for longer, because their hedges keep rolling into higher yields, but the doubled surcharge means the headline benefit isn't the net benefit. Housebuilders are the most exposed and need falling mortgage rates and better margins at the same time, which this decision makes less likely. The FTSE 250's record high assumes the falling oil price holds. If oil climbs back above $100, we'd expect domestic mid-caps to give back ground first.

Go deeper

• The Budget doubled the bank surcharge; the rate rise pays some of it back: the net maths for Lloyds, NatWest and Barclays, per share.
• UK housebuilder stocks: buy on rate cuts or a value trap?
• UK bank stocks: can Lloyds, Barclays and NatWest keep rallying?

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