The Bank of England has raised interest rates again because the cost of living keeps going up.
The benchmark rate went from 3% to 3.5% after the last meeting of the Monetary Policy Committee.
This is the ninth time since December 2021 that the price has gone up. Over the past 14 years, the rate has also been at its highest.
If rates go up, mortgages and loans will cost more, and people who save money in the UK will get more money back on it.
At a meeting in November, the Bank raised its benchmark rate from 2.25 percent to 3 percent. This was the biggest increase since 1989.
How high could the interest rates go?
Rate hikes are likely to happen again. Analysts think that by the middle of next year, rates could reach 4.5%.
But that peak is lower than predicted when the government was in chaos after its mini-budget didn’t go over well.
Eight times a year, the Bank’s monetary policy committee gets together to decide how interest rates will be set.
It is under pressure to raise rates because it wants to keep inflation at 2%, but prices are rising at 10.7%, which is more than five times that level.
Effects of interest rates
The English Housing Survey done by the government shows that just under a third of households have a mortgage.
After years of meager rates, many homeowners will likely have much higher monthly payments. The Bank of England says that about four million homes will pay more each month for their mortgages next year.
When interest rates go up, about 1.6 million people with tracker or variable rate deals see their monthly payments go up immediately.
With the Bank rate going up from 3% to 3.5%, a typical tracker mortgage will cost about £49 more each month. Mortgages with a standard variable rate will go up by £31.
This is on top of the increases after the last rate hikes. Because of this, average tracker mortgage customers will pay about £333 more each month than they did before December 2021, and average variable mortgage customers will pay about £210 more.
Three-quarters of people who have a mortgage have one with a fixed rate. So even though their monthly payments may not change much, people who want to buy a house or refinance will have to pay a lot more than if they had taken out the same mortgage a year ago.
Since the mini-budget in September, this market has been in a lot of trouble, even though most announced policies have been scrapped.
An average two-year fixed deal of 2.29% in November 2021 is now just under 6%. This means that a typical borrower will have to pay hundreds of pounds more each month to pay off their loan.
Loans and credit cards
The interest rates set by the Bank of England also affect how much you pay for things like credit cards, bank loans, and car loans.
Even before the latest decision, the average annual interest rate for bank overdrafts in October was 20.73%, and the average yearly interest rate for credit cards was 19.31%.
Lenders could raise prices even more if they think interest rates will increase.
Banks and building societies usually pass the cost on when interest rates go up to their customers. But the deals you can get now are better than anything you’ve seen in a long time.
But even though this means savers get a better return on their money, interest rates need to go up to keep up with rising prices.
This means the amount of money you can buy with your savings is decreasing.
Why does raising rates make inflation go down?
The Bank has been raising rates to fight inflation, which is when prices go up.
As Covid restrictions were eased and people spent more money, prices increased quickly worldwide.
Many businesses need more goods to sell. And because there are too many buyers for too few goods, prices have gone up.
Oil and gas prices have also increased sharply, which has been made worse by Russia’s invasion of Ukraine.
By making it more expensive to borrow money, raising interest rates helps keep inflation in check. This makes people less likely to borrow money, spend and more likely to save.
But the Bank has to find a good balance because it doesn’t want to slow down the economy. The Bank thinks the UK could be in a recession for two years when the economy is declining. This is longer than we have seen in similar data.
Since the 2008 global financial crisis, interest rates in the UK have been at all-time lows. Rates were 0.1% last year.
Are interest rates going up in other countries?
Prices going up around the world affect the UK. So there is a limit to how effective a rise in interest rates in the UK can be.
Read Also: Federal Reserve: What the rate hike means
But other countries are doing the same thing and raising their interest rates.
The US central bank has announced big rate hikes, which have taken the key rate to a level that hasn’t been seen in almost 15 years.
As inflation continues to cause problems in many major economies, other central banks worldwide have also raised rates.