Interest rates have been raised for the sixth time in a row from 1.25% to 1.75%.
The Bank of England’s decision to increase rates by half a percentage point makes it the largest increase for 27 years.
The move is an attempt to slow the rate at which prices are rising. The Bank has warned that inflation could pass 13% later this year.
The last time interest rates were this high was during the global financial crisis in December 2008.
Why does raising interest rates help lower inflation?
Prices are going up quickly worldwide, as Covid restrictions have been eased and consumers spend more.
Many firms have problems getting enough goods to sell. And with more buyers chasing too few goods, prices have risen.
There has also been a very sharp rise in oil and gas costs – a problem made worse by Russia’s invasion of Ukraine.
One way to try to control rising prices – or inflation – is to raise interest rates.
This increases the cost of borrowing and encourages people to borrow and spend less. It also encourages people to save more.
However, it is a tough balancing act as the Bank does not want to slow the economy too much.
Since the global financial crisis of 2008, UK interest rates have been at historically low levels. Last year, they were as low as 0.1%.
How high could interest rates go?
Many analysts have predicted UK interest rates will rise this month, but further increases are also expected later in the year.
Analysts at Capital Economics think the Bank will ultimately have to lift rates to 3% to quash inflation, but other economists think they won’t have to go so high. Pantheon Macroeconomics reckon interest rates will peak at 1.75%.
This can happen when people think price rises will continue – businesses raise prices to keep making a profit and workers demand wage increases to keep up.
If this happens UK interest rates could hit 3.5%, the OBR said.
How do interest rates affect me?
Just under a third of households have a mortgage, according to the English Housing Survey, which is geographically limited but one of the most comprehensive guides available.
Of those, three-quarters have a fixed mortgage, so will not be immediately affected. The rest – about two million people – will see their monthly repayments rise.
Now rates have gone up to 1.75%, those on a typical tracker mortgage will have to pay about £52 more a month. Those on standard variable rate mortgages will see a £59 increase.
This comes on top of increases following other recent rate rises.
Compared with pre-December 2021, tracker mortgage customers could be paying about £167 more a month, and variable mortgage holders about £132 more.
Even if you don’t have a mortgage, changes in interest rates could still affect you.
Bank of England interest rates also influence the interest charged on things like credit cards, bank loans and car loans.
The Bank’s decisions also affect the interest rates people earn on their savings.
Individual banks usually pass on any interest rate rises – giving savers a higher return on their money.
However, for people putting money away, interest rates are not keeping up with rising prices.
How does the Bank of England set interest rates?
Interest rates are decided by a team of nine economists, the Monetary Policy Committee.
They meet eight times a year – roughly once every six weeks – to look at how the economy is performing.
Their decisions are always published at 12:00 on a Thursday.
Are other countries raising their interest rates?
The UK is affected by prices rising across the globe. So there is a limit as to how effective UK interest rate rises will be.
However, other countries are taking a similar approach, and have also been raising interest rates
How will you be affected by any change to interest rates? Share your experiences by emailing [email protected].
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