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Interest rates: What are they and why do they matter? Interest rates: What are they and how high could they go?
(about 1 month later)
The Bank of England has raised interest rates to 0.5% from 0.25% Interest rates have been raised from 0.5% to 0.75% - their highest level since March 2020.
The decision comes as the Bank also warned that the cost of living was on course to hit a 30-year high. The Bank of England announced its decision a day after US interest rates were raised for the for the first time since 2018.
Why are interest rates going up?
Adjusting interest rates is one of the many ways the Bank tries to manage the UK economy.
Sine the global financial crisis of 2008, UK interest rates have been at historically low levels. In March 2020 the rate was just 0.1%.
The aim was to encourage firms and individuals to borrow or spend money - to get the economy moving.
But there is a balancing act to perform. The Bank wants to encourage spending and growth, but also to make sure that this does not lead to rising prices.
Raising interest rates - to encourage people and firms to borrow and spend less, or to save money - is one of the tools it uses to limit inflation.
Prices are now rising quickly in the UK and around the world, as Covid restrictions ease and consumers spend more.
But many firms are having 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.
Many economists expect inflation to reach 7% this year, which would be its highest level since March 1992.
What is the UK's inflation rate and why does it matter?
How high could interest rates go?
Few had been expecting UK interest rates to top 1.25% this year.
But the Office for Budgetary Responsibility (OBR) - the government's independent economic advisor - looked at the impact of higher and more persistent inflation.
This can happen if people think price rises will continue. Businesses could raise prices to keep making a profit and workers could demand wage increases to maintain living standards.
The OBR has suggested that if this occurs interest rates could reach 3.5%.
How do interest rates affect me?How do interest rates affect me?
Setting interest rates - officially known as Bank Rate - is one of the many ways the Bank of England tries to control the UK economy. If interest rates rise, it can make borrowing more expensive - especially for homeowners with mortgages.
If interest rates rise, it can make borrowing more expensive - especially for homeowners with mortgages - but it can also give savers a better return. Bank of England interest rates also influences the interest charged on other forms of credit, such as credit cards, bank loans and car loans.
Some mortgages - called "trackers" - are directly linked to the Bank of England's interest rates. So even if you don't have a mortgage, changes in interest rates could still affect you.
The Bank's decision to raise interest rates to 0.5% will add just over £25 to the typical monthly repayment for an average tracker-mortgage customer. Bank of England decisions also affect the interest rates people earn on their savings.
As well as mortgages, Bank of England interest rates also influences the interest charged on other forms of credit, such as credit cards, bank loans and car loans. So even if you don't have a mortgage, changes in interest rates could still have an impact on your finances. Individual banks usually pass on any interest rate rises to their savers - giving them a higher return on their money.
It also affects the interest rates people earn on their savings. An increase in rate rise is usually passed on to some extent by individual banks, so people earn more on their savings. How the interest rate rise might affect you
How would an interest rate rise affect you?
Why is the cost of living going up?Why is the cost of living going up?
How does the Bank of England set interest rates?How does the Bank of England set interest rates?
Interest rates are decided by a team of nine economists, the Monetary Policy Committee.Interest rates are decided by a team of nine economists, the Monetary Policy Committee.
It meets eight times a year - roughly once every six weeks - to consider data on how the economy is performing. They meet eight times a year - roughly once every six weeks - to look at how the economy is performing.
And its decision is always published at 12:00 on a Thursday. Their decisions are always published at 12:00 on a Thursday.
What do interest rate changes mean for the economy?
If interest rates go up, it is intended to encourage High Street banks to put up the interest rates they charge individuals and businesses.
Higher interest rates mean people receive a better return on their savings, which should encourage them to save rather than spend.
Encouraging people to save should slow the increase in prices of everyday goods. With fewer buyers in the market, sellers will find it hard to put their prices up.
On the other hand, cutting interest rates makes it cheaper to borrow money and people get less return on their savings. This should encourage spending and help prices rise a little faster.
What is the inflation target?
The Bank of England will raise or lower interest rates to help maintain its 2% inflation target.
Inflation is the rate at which prices are rising - if the cost of a £1 jar of jam rises by 5p, then jam inflation is 5%.
What is the UK's inflation rate and why does it matter?
If prices - sometimes known as the cost of living - are rising faster than 2% a year, the Bank will consider putting up interest rates.
The latest figures show the cost of living surged by 5.4% in the 12 months to December.
Andrew Bailey, governor of the Bank of England
How have interest rates changed recently?
After the 2008 global financial crisis, the Bank of England was afraid that the economy would crash, so it cut interest rates to 0.5% in 2009.
This was good news for many mortgage borrowers, who found their borrowing costs much lower than they had expected.
What is quantitative easing and how will it affect you?
In 2016, it cut interest rates when the economy faced uncertainty following the referendum vote to leave the European Union.
And in 2020, it cut interest rates to its lowest-ever level of 0.1% as the coronavirus pandemic caused the biggest economic slowdown for centuries.
Do you have a tracker mortgage and will now see your repayments rise? Are you worried that rising rates might affect your finances? Email haveyoursay@bbc.co.uk.Do you have a tracker mortgage and will now see your repayments rise? Are you worried that rising rates might affect your finances? Email haveyoursay@bbc.co.uk.
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