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UK interest rates: What the rise means for you Interest rates: How the rise affects you and your money
(2 months later)
The Bank of England has raised interest rates for an 11th consecutive time following a surprise jump in the rate of rising prices. The Bank of England has raised interest rates for a 12th consecutive time as it tries to stop prices rising so quickly.
The Bank rate is up from 4% to 4.25% following a meeting of the Monetary Policy Committee. The Bank rate has gone up to 4.5% from 4.25% following a meeting of the Monetary Policy Committee.
The change means an immediate impact on some borrowers and savers. The change means further pain for some homeowners, but it could benefit savers.
How high could interest rates go?How high could interest rates go?
The Bank rate is already at its highest level for 14 years, rising consistently in response to the soaring cost of living. There was an unexpected increase in the rate of inflation - which charts rising prices - to 10.4% in the year to February, compared with 10.1% in January. The Bank rate is at its highest level for almost 15 years, rising consistently in response to the soaring cost of living. The rate of inflation - which charts rising prices - has remained stubbornly high, in part owing to food prices increasing at their fastest rates for 45 years.
There has been a series of Bank rate increases since December 2021. Prices rose by 8.7% in the year to April, according to the Office for National Statistics (ONS). This is down from 10.1% in March but above the 8.2% figure widely forecast by analysts.
Although there is uncertainty over the coming months, there remains a widespread belief that any rises may end by the middle of the year. The Bank will be keen not to dampen the economy, which has shown little sign of growth. There has been a series of Bank rate increases since December 2021 attempting to control inflation.
Analysts expect the rate to peak at 4.5% in the summer. There is uncertainty over the coming months, not least about whether rate rises may be close to, or at, an end. Some economists suggest there could be one or two more rises.
This is lower than initial predictions after the turmoil of last year's mini-budget. The Bank will be keen not to dampen the economy, which has shown little sign of growth.
The Bank's Monetary Policy Committee meets eight times a year to decide interest rate policy. The next decision will be announced on 11 May. The peak would still be lower than initial predictions after the turmoil of last year's mini-budget.
The Bank's Monetary Policy Committee meets eight times a year to decide interest rate policy.
Why does the Bank of England change interest rates?Why does the Bank of England change interest rates?
It is under pressure to put rates up because it has a target to keep inflation at 2%, but prices are currently rising at more than five times that level. It has been under pressure to put rates up because it has a target to keep inflation at 2%, but prices are currently rising at more than five times that level.
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.
After a period of ultra-low rates, many homeowners are now facing the likelihood of much more expensive monthly repayments. The Bank of England says up to four million households face a higher monthly mortgage bill this year. An estimated 356,000 mortgage borrowers could face difficulties with repayments by July next year, according to City watchdog the Financial Conduct Authority.After a period of ultra-low rates, many homeowners are now facing the likelihood of much more expensive monthly repayments. The Bank of England says up to four million households face a higher monthly mortgage bill this year. An estimated 356,000 mortgage borrowers could face difficulties with repayments by July next year, according to City watchdog the Financial Conduct Authority.
When interest rates rise, more than 1.4 million people on tracker and variable rate deals usually see an immediate increase in their monthly payments.When interest rates rise, more than 1.4 million people on tracker and variable rate deals usually see an immediate increase in their monthly payments.
The increase in the Bank rate from 4% to 4.25% means those on a typical tracker mortgage will pay about £24 more a month. Those on standard variable rate mortgages face a £15 jump. The increase in the Bank rate to 4.5% from 4.25% means those on a typical tracker mortgage will pay about £24 more a month. Those on standard variable rate mortgages face a £15 jump.
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 £394 more a month, and variable rate mortgage holders about £251 more. 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 £417 more a month, and variable rate mortgage holders about £266 more.
Forecasts suggest that they could start to come down again in the summer, but there remains a significant degree of uncertainty about that. Forecasts suggest that they could start to come down again as the year goes on, but there remains a significant degree of uncertainty about that.
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, estimated to be 1.8 million people this year - will have to pay a lot more now than if they had taken out the same mortgage a year or more ago.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, estimated to be 1.8 million people this year - will have to pay a lot more now than if they had taken out the same mortgage a year or more ago.
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.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.
An average two-year fixed deal, which was 2.29% in November 2021, is now 5.32% - potentially a difference of hundreds of pounds each month in repayments for a typical borrower. However, rates are lower than their peak in the autumn, which would have been the most expensive time to take out a fixed deal. An average two-year fixed deal, which was 2.29% in November 2021, is now 5.28% - potentially a difference of hundreds of pounds each month in repayments for a typical borrower. However, rates are lower than their peak in the autumn, which would have been the most expensive time to take out a fixed deal.
You can see how your mortgage may be affected by rising rates with our calculator below.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.If you can't see the calculator, click here.
Credit cards and loansCredit cards and loans
Bank of England interest rates also influence the amount charged on things such as 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 this decision, the average annual interest rate in January was 20.85% on bank overdrafts and 19.9% on credit cards. Even ahead of this decision, the average annual interest rate in March was 21.07% on bank overdrafts and 20.29% on credit cards.
Lenders could decide to put prices up further, if they expect higher interest rates in the future.Lenders could decide to put prices up further, if they expect higher interest rates in the future.
Low interest rates are good for borrowers, but bad for savers
SavingsSavings
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.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.
Analysts say that people should shop around for a better savings rate, with many paid little or nothing in interest in many accounts. Major banks have been under pressure from MPs to pass on rate rises.Analysts say that people should shop around for a better savings rate, with many paid little or nothing in interest in many accounts. Major banks have been under pressure from MPs to pass on rate rises.
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 - its buying power - is falling in real terms.This means the value of cash savings - its buying power - 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 have been going up quickly worldwide, as Covid restrictions eased and consumers spent more.Prices have been going up quickly worldwide, as Covid restrictions eased and consumers spent more.
Many firms have experienced problems getting enough goods to sell. There have been problems in the UK recently with shortages of fresh food. And with more buyers chasing too few goods, prices have increased.Many firms have experienced problems getting enough goods to sell. There have been problems in the UK recently with shortages of fresh food. And with more buyers chasing too few goods, prices have increased.
Oil and gas costs were higher than they had been - a problem made worse by Russia's invasion of Ukraine.Oil and gas costs were higher than they had been - 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 less and spend less, and to save more.Raising interest rates helps to control inflation by making it more expensive to borrow money. This encourages people to borrow less and spend less, and to 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.
Since the global financial crisis of 2008, UK interest rates have been at historically low levels. Rates were at 0.1% in 2021.Since the global financial crisis of 2008, UK interest rates have been at historically low levels. Rates were at 0.1% in 2021.
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 which have taken its key rate to levels not seen for nearly 15 years, but two banking failures in the US this month have raised fears about the health of the financial system. It has just raised rates again. The US central bank has announced big rate rises which have taken its key rate to levels not seen for 16 years. Banking failures in the US have raised fears about the health of the financial system. It has just raised rates again.
The European Central Bank has just raised its main interest rate in Europe by a quarter of a percentage point, to 3.25%.
Other central banks around the world have also raised rates, as inflation continues to cause problems in a host of major economies.Other central banks around the world have also raised rates, as inflation continues to cause problems in a host of major economies.
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Related TopicsRelated Topics
SavingsSavings
MoneyMoney
Personal financePersonal finance
Cost of livingCost of living
UK economyUK economy
Bank of EnglandBank of England
MortgagesMortgages