Keeping up with the Bank of England – how rates and inflation impact your finances

You’ve heard of keeping up with the Kardashians but, when it comes to your personal finances, the real influencers you want to be watching are the Bank of England policymakers. Let’s call it monitoring the Monetary Policy Committee (MPC). 

The Bank of England sets interest rates in an attempt to control inflation and promote economic growth. All of these things play a vital role in dictating the health of your finances. But the latest data suggests a worrying proportion of the population is out of touch when it comes to the state of the UK economy. 

According to the latest inflation attitudes survey from the Bank of England (conducted in August), most people thought the current inflation rate was 5.2%. In fact, it is considerably lower at 2.2%. 

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Meanwhile, 29% of respondents said they expect interest rates to rise over the next 12 months when, in fact, most experts agree they are on a downward trajectory after the Bank of England started cutting interest rates from their sixteen-year high last month. 

“There’s no reason why absolutely everyone should be completely across inflation and interest rates on a daily basis. People have a lot going on, and sometimes keeping abreast of financial changes falls off the to-do list,” says Sarah Coles, head of personal finance at Hargreaves Lansdown. 

“However, if you're saving, borrowing or investing, it’s worth making a date to check in once every few months, to make sure these things haven’t been quietly shifting while you were otherwise occupied,” she adds.

Inflation impacts the value of your savings and investments, while interest rates influence day-to-day costs like how much you are paying on your mortgage. As such, failing to keep up with the latest developments could leave you thousands of pounds out of pocket.

What’s the latest on UK interest rates and why is this information important?

The Bank of England cut interest rates for the first time in over four years on 1 August, bringing the base rate to 5%. This had important implications for savings rates, mortgage rates, house prices and investment markets.

Savings rates have been falling for several months now in anticipation of cuts to the Bank of England base rate, and they tumbled further after the Bank of England’s decision last month. 

Knowing where interest rates are at (and where they could be heading next) can help you make important decisions about where best to put your money. 

Some of the top savings accounts are still offering rates of around 5%, but these deals aren’t sticking around for long and savers might want to think about locking some money away in a fixed-rate savings account, if they don’t need to access the money in the short term. 

Meanwhile, if you are thinking about buying a house or you need to remortgage soon, knowing where interest rates are heading could help you answer important questions like: “Should I fix my mortgage for two years or five years?”

Mortgage rates have been tumbling in recent weeks, creating good opportunities for those who keep up to date with the latest market developments. “The high street giants have announced another raft of cuts this week, and there are now fixed-rate deals charging less than 4%,” Coles points out. 

The close link between interest rates and mortgage rates means MPC decisions have an important bearing on the UK property market too. Earlier this month, Amanda Bryden, head of mortgages at Halifax, said that “prospective homebuyers are feeling more confident thanks to easing interest rates”. 

This is gradually translating into house prices which were up 4.3% annually in August, according to the latest Halifax House Price Index.

Interest rates also have an important bearing on investment markets, so it is important to stay up to date if you are thinking about which investments to add to your pension or stocks and shares ISA. See our recent feature: “Where to invest as interest rates fall”. 

The Bank of England will meet this week to make its next interest rate decision. 

How does inflation impact your finances?

Inflation might be a quiet thief, but it is one of the biggest wealth destroyers. Imagine you had £1,000 stashed under the bed (a terrible idea, by the way). Even if inflation were to sit at around 2%, it would only take 36 years for the value of your nest egg to halve. 

Of course, over the past few years, the rate of inflation has been far higher than this. UK inflation peaked at 11.1% in October 2022. At this elevated level, it would only take around six years for the value of your money to halve. 

The good news is that many savings accounts are now offering real returns – but you need to stay on top of the latest economic news to know whether your provider is giving you a good deal. If you aren’t earning a competitive rate, now is the time to switch. This is particularly important if your rate isn’t even beating inflation.

Knowing the rate of inflation (and the outlook going forward) is important from a budgeting perspective as well. It can help you calculate how much your regular outgoings are likely to change in the near future. 

This will influence how much you are able to save and how much you will need to earn to cover the essentials. If costs are going up, it might be reasonable to have a conversation with your employer about whether salaries are likely to increase in line with inflation too. 

Understanding the rate and impact of inflation is also important if you are an investor, as some investments are more sensitive to inflation than others. For example, gold is often heralded as an asset that retains its value well. Equities can also be a good hedge against inflation in some instances, while assets like bonds and cash don’t tend to do so well.