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UK interest rates: How does a rise affect me? UK interest rates: How does a rise affect me?
(25 days later)
Interest rates have been raised for the sixth time in a row from 1.25% to 1.75%.Interest rates have been raised for the sixth time in a row from 1.25% to 1.75%.
The Bank of England's decision to increase rates by half a percentage point makes it the largest increase for 27 years.The Bank of England's decision to increase rates by half a percentage point makes it the largest increase for 27 years.
The move is an attempt to slow the rate at which prices are rising. The Bank has warned that inflation could pass 13% later this year.The move is an attempt to slow the rate at which prices are rising. The Bank has warned that inflation could pass 13% later this year.
The last time interest rates were this high was during the global financial crisis in December 2008.The last time interest rates were this high was during the global financial crisis in December 2008.
Why does raising interest rates help lower inflation?Why does raising interest rates help lower inflation?
Prices are going up quickly worldwide, as Covid restrictions have been eased and consumers spend more.Prices are going up quickly worldwide, as Covid restrictions have been eased and consumers spend more.
Many firms have problems getting enough goods to sell. And with more buyers chasing too few goods, prices have risen.Many firms have 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.
Why are prices rising so quickly?Why are prices rising so quickly?
One way to try to control rising prices - or inflation - is to raise interest rates.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.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.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%.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?
Many analysts have predicted UK interest rates will rise this month, but further increases are also expected later in the year.Many analysts have predicted UK interest rates will rise this month, but further increases are also expected later in the year.
Analysts at Capital Economics think the Bank will ultimately have to lift rates to 3% to quash inflation, but other economists think they won't have to go so high. Pantheon Macroeconomics reckon interest rates will peak at 1.75%.Analysts at Capital Economics think the Bank will ultimately have to lift rates to 3% to quash inflation, but other economists think they won't have to go so high. Pantheon Macroeconomics reckon interest rates will peak at 1.75%.
Last year, the Office for Budgetary Responsibility (OBR) - the government's independent economic adviser - looked at what might happen if the UK were to experience higher and longer lasting inflation.Last year, the Office for Budgetary Responsibility (OBR) - the government's independent economic adviser - looked at what might happen if the UK were to experience higher and longer lasting inflation.
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.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.
If this happens UK interest rates could hit 3.5%, the OBR said.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?
MortgagesMortgages
Just under a third of households have a mortgage, according to the English Housing Survey, which is geographically limited but one of the most comprehensive guides available.Just under a third of households have a mortgage, according to the English Housing Survey, which is geographically limited but one of the most comprehensive guides available.
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.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.
Now rates have gone up to 1.75%, those on a typical tracker mortgage will have to pay about £52 more a month. Those on standard variable rate mortgages will see a £59 increase.Now rates have gone up to 1.75%, those on a typical tracker mortgage will have to pay about £52 more a month. Those on standard variable rate mortgages will see a £59 increase.
This comes on top of increases following other recent rate rises.This comes on top of increases following other recent rate rises.
Compared with pre-December 2021, tracker mortgage customers could be paying about £167 more a month, and variable mortgage holders about £132 more.Compared with pre-December 2021, tracker mortgage customers could be paying about £167 more a month, and variable mortgage holders about £132 more.
Credit cards and loansCredit cards and loans
Even if you don't have a mortgage, changes in interest rates could still affect you.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.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 20.23% on bank overdrafts and 18.56% on credit cards in June. Lenders could decide to increase these fees now that interest rates have risen.Even ahead of this latest rise, the average annual interest rate was 20.23% on bank overdrafts and 18.56% on credit cards in June. Lenders could decide to increase these fees now that interest rates have risen.
'If rates go up I'll owe £250 a month more on my loans''If rates go up I'll owe £250 a month more on my loans'
SavingsSavings
The Bank's decisions also affect the interest rates people earn on their 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.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.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?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 ratesHowever, 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 last couple of months. The Federal Reserve increased rates by three-quarters of a percentage point in June and then again in July, to a range of 2.25% to 2.5%.The US central bank has announced big rate rises in the last couple of months. The Federal Reserve increased rates by three-quarters of a percentage point in June and then again in July, to a range of 2.25% to 2.5%.
The European Central Bank has also raised rates for the first time in more than 11 years, while Brazil, Canada, India, Australia and Switzerland have increased rates too.The European Central Bank has also raised rates for the first time in more than 11 years, while Brazil, Canada, India, Australia and Switzerland have increased rates too.
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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