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UK interest rates: How high could they go? UK interest rates: How will the rise affect you and how high could it go?
(about 1 month later)
The Bank of England has warned interest rates could rise again after the value of the pound plummeted, following the government's decision to cut taxes and borrow more. Interest rates have risen sharply as the Bank of England continues to use its powers to tackle soaring prices.
That could have a big impact on the cost of borrowing and people's finances. The Bank has increased its benchmark rate from 2.25% to 3%.
That is the eighth consecutive increase since December, pushing the rate to its highest level for 14 years.
It also marks the biggest single increase since 1989, and could have a big impact on the cost of living and people's finances.
How high could interest rates go?How high could interest rates go?
On 22 September, the Bank of England raised rates by 0.5 percentage points to 2.25% - the highest level for 14 years. The Bank increased rates to 3% during its November meeting. This move followed a 0.5 percentage point increase to 2.25% at the previous meeting in September.
It said it will "not hesitate" to hike interest rates further after the pound fell to a record low against the US dollar. Analysts suggest rates could reach 4.75% next year.
One estimate suggests rates could reach 6% next year. That's based on the price investors are already paying to borrow money, according to data provider Bloomberg. However, that peak is lower than predictions had suggested a few weeks ago, when the government was in some turmoil after its mini-budget was badly received.
The Bank's monetary policy committee meets every month to decide interest rate policy. The Bank's monetary policy committee meets eight times a year to decide interest rate policy.
There had been some speculation it would call an emergency meeting to deal with the crisis, but the Bank released a statement confirming it will wait until the next scheduled meeting on 3 November. It is under pressure to put rates up because it has a target to keep inflation at 2%, but prices are currently rising at about five times that level.
The Bank is under pressure to put rates up because it has a target to keep inflation at 2%, but prices are currently rising at about five times that level. Considerable uncertainty remains around the government's economic policy, with a key Autumn Statement due to be delivered by the chancellor on 17 November.
How do interest rates affect me?How do interest rates affect me?
MortgagesMortgages
Just under a third of households have a mortgage, according to the government's English Housing Survey.Just under a third of households have a mortgage, according to the government's English Housing Survey.
When interest rates rise, about two million people on tracker and variable rate deals see an immediate increase in their monthly payments. After a period of ultra-low rates, many homeowners are now facing the possibility of much more expensive monthly repayments.
The recent increase to 2.25% means those on a typical tracker mortgage pay about £49 more a month. Those on standard variable rate mortgages face a £31 jump. When interest rates rise, about 1.6 million people on tracker and variable rate deals usually see an immediate increase in their monthly payments.
This comes on top of increases following previous recent rate rises. Compared with pre-December 2021, on average tracker mortgage customers are paying about £216 more a month, and variable mortgage holders about £163 more. The increase in the Bank rate from 2.25% to 3% means those on a typical tracker mortgage will pay about £73.50 more a month. Those on standard variable rate mortgages face a £46 jump.
There is also an impact on fixed deals, which about three-quarters of mortgage customers have. This comes on top of increases following the previous recent rate rises. Compared with pre-December 2021, average tracker mortgage customers will be paying about £284 more a month, and variable mortgage holders about £179 more.
Their monthly payments may not change immediately, but with lenders now anticipating higher rates, any new deals will be more expensive. That means new house buyers - or anyone seeking to remortgage - will also have to pay more. Three-quarters of mortgage customers hold a fixed rate mortgage. Their monthly payments may not change immediately, but house buyers - or anyone seeking to remortgage - will have to pay a lot more now than if they had taken out the same mortgage a year ago.
An average two-year fixed deal which was 2.29% in November last year is now 4.24% - a difference of hundreds of pounds each month in repayments for a typical borrower. There has been considerable upheaval in this market since September's mini-budget, even though most of the policies that were announced have now been ditched.
Some lenders are also pulling deals while they recalculate prices, meaning there is less choice available. An average two-year fixed deal, which was 2.29% in November 2021, is now 6.47% - a difference of hundreds of pounds each month in repayments for a typical borrower.
'I was ready to buy a house, now I'm totally lost' However, there is a possibility that fixed mortgage rates are at their peak for the time-being, and could start to fall.
You can see how your mortgage may be affected by rising rates with our calculator below.
If you can't see the calculator, click here.
Credit cards and loansCredit cards and loans
Bank of England interest rates also influence the interest charged on things like credit cards, bank loans and car loans. Bank of England interest rates also influence the amount charged on things such as credit cards, bank loans and car loans.
Even ahead of the latest decision, the average annual interest rate in July was 19.9% on bank overdrafts and 18.57% on credit cards. Even ahead of the latest decision, the average annual interest rate in September was 20.83% on bank overdrafts and 18.96% on credit cards.
Lenders could decide to put prices up further, in expectation of higher interest rates in the future.Lenders could decide to put prices up further, in expectation of higher interest rates in the future.
'If rates go up I'll owe £250 a month more on my loans'
SavingsSavings
Individual banks and building societies usually pass on interest rate rises to customers. Individual banks and building societies usually pass on interest rate rises to customers. The deals being offered now are better than anything seen for years.
But although this means savers get a higher return on their money, interest rates are not keeping up with rising prices.But although this means savers get a higher return on their money, interest rates are not keeping up with rising prices.
This means the value of cash savings is falling in real terms.This means the value of cash savings is falling in real terms.
Why does increasing interest rates help lower inflation?Why does increasing interest rates help lower inflation?
The Bank has been putting rates up to combat rising prices - known as inflation.The Bank has been putting rates up to combat rising prices - known as inflation.
Prices are going up quickly worldwide, as Covid restrictions have eased and consumers spend more. Prices have been going up quickly worldwide, as Covid restrictions eased and consumers spent more.
Many firms have problems getting enough goods to sell. And with more buyers chasing too few goods, prices have increased.Many firms have problems getting enough goods to sell. And with more buyers chasing too few goods, prices have increased.
There has also been a very sharp rise in oil and gas costs - a problem made worse by Russia's invasion of Ukraine.There has also been a very sharp rise in oil and gas costs - a problem made worse by Russia's invasion of Ukraine.
Raising interest rates helps to control inflation by making it more expensive to borrow money. This encourages people to borrow and spend less, and save more.Raising interest rates helps to control inflation by making it more expensive to borrow money. This encourages people to borrow and spend less, and save more.
However, it is a tough balancing act as the Bank does not want to slow the economy too much. However, it is a tough balancing act as the Bank does not want to slow the economy too much. The Bank is predicting that the UK could be in recession - a period of economic decline - for two years which is longer than we have seen in comparable statistics.
Since the global financial crisis of 2008, UK interest rates have been at historically low levels. Last year saw rates of 0.1%.Since the global financial crisis of 2008, UK interest rates have been at historically low levels. Last year saw rates of 0.1%.
Why are people talking about more rate rises now?
The mini-budget of 23 September was followed by a sharp fall in the pound.
Investors are worried that the UK government is borrowing too much money.
The drop in Sterling is a problem because a weak pound makes it more expensive to buy imports - from crude oil to food.
That pushes up prices and so the Bank may feel it has to put up interest rates to knock inflation back down.
Tax cuts announced by the government could also drive inflation by giving people more money to spend - another reason for the Bank to put up rates.
That's why economists are now talking about rates peaking at over 6%.
Are other countries raising their interest rates?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.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 However, other countries are taking a similar approach, and have also been raising interest rates.
The US central bank has announced big rate rises in the past few months. Other central banks around the world have also raised rates. The US central bank has announced big rate rises, taking its key rate to the highest level for nearly 15 years.
Other central banks around the world have also raised rates, as inflation continues to cause problems in a host of major economies.
How will you be affected by any change to interest rates? Share your experiences by emailing haveyoursay@bbc.co.uk.How will you be affected by any change to interest rates? Share your experiences by emailing haveyoursay@bbc.co.uk.
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