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How high can they go? Interest rates in the UK…

Deputy Governor for Financial Stability at the Bank of England, Sir John Cunliffe, speaking to ITV News last week:

That inflation doesn’t become the new normal. So interest rates may well have to rise further.

The pandemic seems like a distant memory now but it wasn’t so long ago when the world was brought to its knees with deaths in the millions and the shut down of the global economy. Most of us will recall the PM’s  and Chancellor’s evening announcements as well as the emergency Base Rate rate cuts to 0.25% and then to 0.10%. More than two years on, the Bank of England Base Rate is now at 1.00%, above pre-pandemic levels; this is in spite of heightened geopolitical concerns, supply shortages and historically high volatility across several asset classes. Why are rates increasing and how does this affect you? 

The key driver for the rise in rates at present is inflation. Simply put, inflation is the increase in prices over time and the rate of inflation measures how quickly those prices go up over time. You will undoubtedly have noticed your increased expenditure on energy, fuel and food in recent months. 

Recent inflation rates for UK

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual
2022 5.4% 6.1% 7.0% 9.0%
2021 0.7% 0.5% 0.7% 1.5% 2.1% 2.5% 2.0% 3.2% 3.0% 4.1% 5.1% 5.4% 2.6%
2020 1.8% 1.7% 1.5% 0.8% 0.6% 0.6% 1.1% 0.2% 0.6% 0.7% 0.4% 0.6% 0.9%
2019 1.8% 1.8% 1.9% 2.1% 2.0% 2.0% 2.0% 1.8% 1.8% 1.5% 1.4% 1.3% 1.8%
2018 3.0% 2.7% 2.4% 2.4% 2.4% 2.4% 2.5% 2.6% 2.4% 2.4% 2.3% 2.1% 2.5%

Based on CPI data for UK – Table above from

The target inflation rate for the UK is 2% and it’s the Bank of England’s job to keep inflation at that target level. Inflation is currently 9% (a 40-year high). 

The primary route for the Bank of England to control inflation is through increasing or decreasing interest rates. If interest rates rise, the cost of borrowing including mortgage repayments will increase. The overall effect is that consumption will decrease and savings will increase.

MPC members have said that further increases in borrowing costs may be required with the current inflation outlook but they are also mindful of the potential recession lurking around the corner. There are mixed views amongst market participants with one side being cautious about aggressive rate rises leading to a crash of the economy and the other unquestionably supporting a tightening of monetary policy through rate rises in order to  stop price pressures from becoming uncontrollable. 

The market is pricing in circa five more rate hikes by the end of 2022 predicting a Base Rate of 2.50% for 2023. Current swap rates and cap premiums may appear ‘expensive’ but it is important to remember that they are a reflection of the market’s expectations. You can view GBP swap rates on our Daily Market Rates sheet by clicking here.

If you have any variable rate borrowing for your business or just through a mortgage on your home, you will have already seen the effect on your quarterly/monthly payments over the last six months. Further rate hikes are not a certainty but given the current inflationary pressures, it would be prudent for anyone with variable rate debt to consider their exposure to further rate rises. 

We wrote in our post about the significantly increased activity in hedging in November last year (click here to read) – activity levels have only increased with borrowers exploring hedging options via their lenders as well as independent hedging providers. We work with a panel of independent cap providers who are able to offer both Base Rate and SONIA caps. Please click here to view our article on independent interest rate caps.

To give you a feel for current pricing, a five-year SONIA cap for £5M protecting 3.00% will cost approximately £200K.

Please get in touch with any questions you may have and a member of our team will be able to assist you.

You can reach us on 0207 183 2277 or at