As inflation stabilised following a period of prices rising more rapidly than usual, there were expectations that the Bank of England’s (BoE) base interest rate would be cut throughout 2025. However, a potential trade war could mean the opposite happens and lead to higher mortgage outgoings for millions of homeowners.
Read on to find out how inflation and interest rates are connected, and why they might affect your finances.
The Bank of England may raise the base interest rate when inflation is high
In simple terms, inflation is the rate of price increases for goods and services.
If a TV was £200 a year ago and today it’s £210, the rate of inflation is 5%. That might seem like a small difference, but over time it compounds. If the rate of inflation remained the same, the same TV would cost more than £255 in five years.
The government calculates inflation by monitoring the cost of a virtual shopping basket that contains more than 750 items, from grocery staples to electronics.
Keeping inflation low and stable is a good thing for the wider economy. Indeed, the BoE has a target of keeping inflation at 2%.
One of the ways the BoE may control inflation is to change the interest rate. Higher interest rates might encourage households and businesses to cut back their overall spending, resulting in inflation slowing down.
So, when the pandemic and the war in Ukraine led to inflation reaching more than 11% in October 2022, the BoE increased the base interest rate. Between the end of 2021 and August 2023, it went from 0.1% to 5.25%, which led to a higher cost of borrowing, including through mortgages.
Inflation is now near the BoE target – it was 2.6% in the 12 months to March 2025.
This has led to the BoE cutting the base rate, which was 4.5% as of April 2025, and there was an expectation that it would continue to fall. However, a trade war could spark higher rates of inflation.
US tariffs might fuel higher rates of inflation
The new US administration under President Donald Trump has announced a series of tariffs over the last few months, including a 10% baseline tariff on almost all countries.
A tariff is a tax imposed by the government on imported goods from other countries. This can drive up prices, particularly if the UK imposed a retaliatory tariff on goods, and present challenges for businesses.
An April 2025 report published in the House of Lords Library explains: “One criticism of tariffs is that they raise prices for consumers and firms buying goods from abroad, so fuelling inflation.”
As a result, interest rates in the UK could rise rather than fall in the coming months. Indeed, a March 2025 poll in IFA Magazine suggests almost 7 in 10 mortgage brokers believe the BoE base interest rate will be higher than 4.5% at the start of 2026.
It’s important to note that inflation isn’t the only factor that influences the BoE when it’s setting the base interest rate. Inflation rising doesn’t automatically mean interest rates will rise, but, if you’re a borrower, being aware of the implications may be useful.
A higher interest rate could increase mortgage costs
The base interest rate has a direct effect on the cost of borrowing. So, if you have a variable mortgage deal, or your deal ends soon, a trade war might increase the cost of your mortgage.
Let’s say you’ve borrowed £200,000 through a repayment mortgage with a 20-year term and an interest rate of 4.5%. Your monthly repayment would be £1,265 and, assuming the interest rate remained the same, you’d pay around £103,500 in interest over the full mortgage term.
Now imagine the interest rate increases by just 1%. Your monthly repayment would rise to £1,376 and the total interest paid would be more than £130,000.
Being aware of how changes to the interest rate might affect you could help you manage your budget more effectively.
If your mortgage deal ends soon, the current situation might change what’s right for you too.
You may want to opt for a fixed-rate mortgage, which would mean changes to the base interest rate won’t affect you for a defined period, if you’re worried about how you’d manage rising costs.
Remember, you can usually lock in a mortgage deal up to six months before your current deal ends.
Searching for a deal as soon as possible could allow you to lock in a rate now and protect yourself from a potential rise. Should interest rates fall, you can normally switch without paying a fee so long as your new deal hasn’t started.
Contact us to talk about your mortgage deal
If you have questions about how changes to the interest rate may affect your outgoings, or if you’re searching for a new mortgage deal, please get in touch. We can provide answers and work with you to find a lender that suits your needs.
Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
