The interest rate has been raised for the sixth consecutive time from 1.25% to 1.75%.
The Bank of England decided to raise interest rates by half a percentage point, making it the biggest increase in 27 years.
The move was made to slow the pace of price increases. The central bank warned that inflation could exceed 13 percent later this year.
The last time interest rates were this high was in December 2008, during the global financial crisis.
Why does raising interest rates help lower inflation?
Global prices are rising rapidly as restrictions on the new crown epidemic are eased and consumers are spending more.
Many companies are having problems getting enough goods to sell. Prices have risen as more buyers chase too few commodities.
Oil and gas costs have also skyrocketed – a problem made worse by Russia’s invasion of Ukraine.
One way to try to control price increases 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’s a tough balancing act because the banks don’t want the economy to slow down too much.
Interest rates in the UK have been at historically low levels since the global financial crisis in 2008. Last year, they were as low as 0.1%.
How high could interest rates go?
Many analysts predict that U.K. interest rates will rise this month, but further increases are expected later this year.
Analysts at Capitol Macro believe the central bank will eventually have to raise rates to 3% to curb inflation, but other economists don’t think they have to go too high. pantheon Macroeconomics estimates rates will peak at 1.75%.
Last year, the U.K. government’s independent economic advisers, the Office for Budget Responsibility (OBR), looked at what might happen if the U.K. experienced higher and more persistent inflation.
This happens when people think prices will continue to rise – businesses raise prices to stay profitable, and workers demand pay rises to keep up.
If that happens, the OBR says, interest rates in the U.K. could reach 3.5 percent.
How do interest rates affect me?
Less than 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.
Three quarters of these have fixed mortgages and so will not be immediately affected. The rest – about 2 million people – will see their monthly payments increase.
Now that rates have risen to 1.75%, those with typical tracker mortgages will have to pay around £52 more a month. Those with a standard variable rate mortgage will pay £59 more.
This follows other recent rate rises.
Compared to the period before December 2021, tracker mortgage customers could pay around £167 more per month and variable mortgage holders around £132 more per month.
Credit cards and loans
Even if you don’t have a mortgage, changes in interest rates can still affect you.
The Bank of England interest rate also affects the interest charged on credit cards, bank loans and car loans.
Even before the most recent rise, the average annual interest rate for bank overdrafts in June was 20.23% and for credit cards 18.56%. Now that interest rates have risen, lenders could decide to increase those fees.
“If interest rates go up, I will owe an extra £250 a month on my loan”
Bank decisions can also affect the interest rates people earn from their savings.
Individual banks often pass on any interest rate rises – giving savers a higher return on their money.
However, for people who put their money away, interest rates can’t keep pace with rising prices.
However, other countries are taking a similar approach, and have also been raising interest rates
Interest rates are decided by a team of nine economists on the Monetary Policy Committee (MPC).
They meet eight times a year – about once every six weeks – to see how the economy is doing.
Their decisions are always released at 12:00 on Thursdays.
Are other countries raising their interest rates?
The UK is affected by global price increases. Therefore, there is a limit to the effectiveness of interest rate hikes in the UK.
However, other countries are taking a similar approach and have been raising interest rates as well
The Federal Reserve has announced significant interest rate increases in the past few months. The Fed raised rates by three-quarters in June and again in July, to a range of 2.25% to 2.5%.
The European Central Bank also raised rates for the first time in more than 11 years, while Brazil, Canada, India, Australia and Switzerland have also raised rates.