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Interest rates: How a rise affects you and your money Interest rates: How a rise affects you and your money
(30 days later)
The Bank of England has raised interest rates for a 13th consecutive time as it tries to stop prices rising so quickly. The Bank of England has put up interest rates 13 times in an attempt to slow rising prices.
The Bank rate, set by the Monetary Policy Committee, has gone up to 5% from 4.5%. In June, the Bank rate, set by the Monetary Policy Committee, went to 5% from 4.5%.
The change means further pain for some homeowners, but it could benefit savers. That meant further pain for some homeowners, but was good news for savers.
How high could interest rates go?How high could interest rates go?
The Bank rate is at its highest level for 15 years, as the Bank tries to slow the rise in the cost of living. The Bank rate is currently at its highest level for 15 years.
But the rate seems likely to go higher. Bank governor Andrew Bailey has said that if prices continue to rise rapidly then further rate increases will be needed. The financial markets expect rates to peak at about 6% early next year. The theory is that raising interest rates makes it more expensive to borrow money, meaning people have less to spend, reducing demand and inflation,
The theory is that raising interest rates makes it more expensive to borrow money, meaning people have less to spend, and so bringing down demand and slowing price rises. The Bank has put up rates 13 consecutive times since December 2021 to try and bring inflation closer to its target of 2%.
There has been a series of Bank rate increases since December 2021 attempting to control inflation - which charts rising prices. The inflation rate target is 2%.
But, so far, the impact has been limited and is likely to take more time to feed through.But, so far, the impact has been limited and is likely to take more time to feed through.
Prices rose by 8.7% in the year to May, according to the Office for National Statistics (ONS). This is the same as the previous month but down from its peak of 11.1%. Prices rose by 7.9% in the year to June, according to the Office for National Statistics (ONS). This was lower than 8.7% in the year to May, and down from the peak of 11.1% in October 2022.
There is particular concern over the core inflation rate - a measure which strips out volatile factors such as food and energy - which has been going up. However, that is still almost four times the Bank's 2% target.
As a result, uncertainty remains about what will happen in the coming months, but many economists believe there could be more rate rises to come. Concerns also remain over the "core inflation" rate - a measure which strips out volatile factors such as food and energy. Although it dipped slightly in June, it is still relatively high.
The Bank has to balance the risk of damaging the economy, which has shown little sign of growth, with its battle to slow price rises. As a result, there is uncertainty about what will happen in the coming months, but the financial markets expect rates to peak at about 6% early next year.
The Bank's Monetary Policy Committee meets eight times a year to decide interest rate policy. The Bank has to balance the risk of damaging the economy, which has shown little sign of growth, with the need to slow price rises.
Its Monetary Policy Committee meets eight times a year to decide rates, with the next announcement due on 3 August.
Why does the Bank of England change interest rates?Why does the Bank of England change interest rates?
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, more than 1.4 million people on tracker and standard variable rate (SVR) deals usually see an immediate increase in their monthly payments.When interest rates rise, more than 1.4 million people on tracker and standard variable rate (SVR) deals usually see an immediate increase in their monthly payments.
The rise from 4.5% to 5% means those on a typical tracker mortgage will pay about £47 more a month. Those on SVR mortgages face a £30 jump. The rise from 4.5% to 5% means those on a typical tracker mortgage pay about £47 more a month. Those on SVR mortgages face a £30 jump.
Since December 2021, that's an increase in monthly repayments of £465 on a tracker and £297 on an SVR. Since December 2021, monthly repayments on a tracker have gone up by £465, while SVR repayments have increased by £297.
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 fixed-rate deals.
The so-called "mortgage bomb" has become a huge economic and political issue. An average two-year fixed deal, which was 2.29% in November 2021, is now above 6%. Their monthly payments may not change immediately, but higher interest rates mean housebuyers - or the 1.8 million people expected to remortgage this year - will have to pay a lot more than if they had taken out the same mortgage a year or more ago.
As people roll off cheap fixed-rate deals onto products with much higher rates, their monthly repayments can become hundreds of pounds more expensive. An average two-year fixed deal, which was 2.29% in November 2021, is now well above 6%.
The Institute for Fiscal Studies, a politically independent economics-focused think tank, says rising interest rates could mean 1.4 million mortgage holders see their disposable incomes fall by more than 20%. The so-called "mortgage bomb" has become a huge economic and political issue.
You can see how your mortgage may be affected by rising rates with our calculator below. As people roll off cheap fixed-rate deals onto products with much higher rates, their monthly repayments can soar by hundreds of pounds.
The IFS, a politically independent think tank, warns rising interest rates could mean 1.4 million mortgage holders see their disposable income fall by more than 20%.
You can see how your mortgage may be affected by rising rates with our calculator:
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 credit cards, bank loans and car loans.
Even ahead of this decision, the average annual interest rate in April was 21.86% on bank overdrafts and 20.13% on credit cards. Even before the most recent increase, the average annual interest rate in April was 21.86% on bank overdrafts and 20.13% 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 saversLow 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.
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. There are some good deals on the market, so analysts say that customers should shop around, as many will be on accounts paying little or nothing.
But although this means savers get a higher return on their money, interest rates are not keeping up with rising prices. MPs have been putting pressure on banks to ensure savers get the best deals.
But although many saving accounts are paying more, even the best interest rates aren't keeping up with inflation.
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 have prices been going up?Why have prices been going up?
The Bank has been putting rates up to combat rising prices - known as inflation. Inflation has gone up worldwide, after Covid restrictions eased and consumers spent more.
Prices have been going up quickly worldwide, as Covid restrictions eased and consumers spent more. Many firms experienced problems getting enough goods to sell. Oil and gas costs were also higher than they had been - a problem made worse by Russia's invasion of Ukraine.
Many firms experienced problems getting enough goods to sell. Oil and gas costs were higher than they had been - a problem made worse by Russia's invasion of Ukraine. Although many elements of inflation are global, there are also domestic factors at play in the UK, including rising wages.
Although many elements of inflation are global, there are concerns that some are domestic, such as rising wages.
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. Central banks around the world have also been raising interest rates to try and tackle abnormally high inflation.
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 16 years, although it held them at its June meeting.
The US central bank has announced big rate rises which have taken its key rate to levels not seen for 16 years, although it held them at its last meeting.
The European Central Bank recently raised its main interest rate in Europe by a quarter of a percentage point, to 4%.The European Central Bank recently raised its main interest rate in Europe by a quarter of a percentage point, to 4%.
Other central banks around the world have also raised rates, as inflation continues to cause problems in a host of major economies.
Related TopicsRelated Topics
SavingsSavings
MoneyMoney
Personal financePersonal finance
Cost of livingCost of living
UK economyUK economy
Bank of EnglandBank of England
MortgagesMortgages