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Interest rates: What are they and how high could they go? Interest rates: What are they and how high could they go?
(about 2 months later)
Interest rates have been raised from 0.5% to 0.75% - their highest level since March 2020. Interest rates have been raised from 0.75% to 1% - their highest level for 13 years.
The Bank of England announced its decision a day after US interest rates were raised for the for the first time since 2018. The Bank of England hopes to slow the rate at which prices are increasing. It warned that inflation would be over 10% by the end of the year - something not seen since 1982.
Why are interest rates going up? Why are prices and interest rates rising?
Adjusting interest rates is one of the many ways the Bank tries to manage the UK economy. Prices are going up quickly worldwide, as Covid restrictions ease and consumers spend more.
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%. Many firms have problems getting enough goods to sell. And with more buyers chasing too few goods, prices have risen.
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.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. Why are prices rising so quickly?
What is the UK's inflation rate and why does it matter? One way to try to control rising prices - 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 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. Last year, they were as low as 0.1%.
How high could interest rates go?How high could interest rates go?
Few had been expecting UK interest rates to top 1.25% this year. Many people expect UK interest rates to reach 1.25% this year - but they could go higher.
But the Office for Budgetary Responsibility (OBR) - the government's independent economic advisor - looked at the impact of higher and more persistent inflation. The Office for Budgetary Responsibility (OBR) - the government's independent economic advisor - looked at what might happen if the UK were to experience higher and longer lasting 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. This can happen when people think price rises will continue - businesses raise prices to keep making a profit and workers demand wage increases to keep up.
The OBR has suggested that if this occurs interest rates could reach 3.5%. If this happens UK interest rates could hit 3.5%, the OBR said.
How do interest rates affect me?How do interest rates affect me?
If interest rates rise, it can make borrowing more expensive - especially for homeowners with mortgages. 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. About a third of UK adults have a mortgage. Of those, three-quarters have a fixed mortgage, so will not be immediately affected. The rest - about two million people - will see their monthly repayments rise.
So even if you don't have a mortgage, changes in interest rates could still affect you. Those on a typical tracker mortgage will have to pay about £25 more a month. Those on standard variable rate mortgages will see a £16 increase.
Bank of England decisions also affect the interest rates people earn on their savings. This comes on top of increases following other recent rate rises.
Individual banks usually pass on any interest rate rises to their savers - giving them a higher return on their money. Compared with pre-December 2021, tracker mortgage customers could be paying about £90 more a month, and variable mortgage holders about £57 more.
How the interest rate rise might affect you Credit cards and loans
Why is the cost of living going up? Even if you don't have a mortgage, changes in interest rates could still affect you.
Bank of England interest rates also influence the interest charged on things like credit cards, bank loans and car loans.
Even ahead of this latest rise, the average annual interest rate was 20.3% on bank overdrafts and 18.01% on credit cards in March. Lenders could decide to increase these fees now that interest rates have risen.
Savings
The Bank's decisions also affect the interest rates people earn on their savings.
Individual banks usually pass on any interest rate rises - giving savers a higher return on their money.
However, for people putting money away, interest rates are not keeping up with rising prices.
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.
They meet eight times a year - roughly once every six weeks - to look at how the economy is performing.They meet eight times a year - roughly once every six weeks - to look at how the economy is performing.
Their decisions are always published at 12:00 on a Thursday.Their decisions are always published at 12:00 on a Thursday.
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.
However, other countries are taking a similar approach, and have also been raising interest rates:
US: raised rates to 1% - its biggest interest rate increase in more than two decades
India: raised rates to 4.4% - the first rate hike in two years
Australia: raised rates to 0.35% - the first rate rise in over a decade
Mexico: raised rates to 6.5%
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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