The Bank of England has hiked interest rates for the tenth time in a row, putting even more pressure on households amid the ongoing cost of living crisis. The Bank said the decision on Thursday was taken to help keep inflation under control and indicated that it might be nearing the end of its successive interest rate rises.
The Bank also forecast that an expected recession will be shorter and shallower than previously thought. It came as Chancellor Jeremy Hunt said that he would try to "support" Governor Andrew Bailey and his team's efforts to lower inflation in next month's Spring budget, due to take place on March 15.
Decision makers on the Bank's Monetary Policy Committee (MPC) opted to hike the base rate from 3.5% to 4%, to help bring double-digit inflation under control. Inflation has already started to come down off the highs of late last year, and the Bank said it expects the measure to fall quickly in 2023.
But what does this all mean for inflation and homeowners? Below is a quick overview of the impact of the new interest rats rise.
It’s worth noting that the impact on credit cards will be negligible due to the current high interest rates already implemented by most lenders.
Why has the bank increased rates?
The Bank of England is tasked with keeping inflation under control. At the moment inflation is not under control, it hit 10.5% in the year to December.
The main tool that the MPC has to combat inflation is its authority to decide the base interest rate. If it raises rates, it is generally seen as putting downward pressure on inflation, if it slashes the rate then inflation should often rise.
Why do interest rates impact inflation?
In simple terms which skip a few steps, the base rate is used by normal banks to help them decide what interest rate to charge borrowers, and also what to pay to savers. This means that people taking out a mortgage will have to pay more interest on their loan, which means they have less money left in their pockets by the end of the month, which in turn reduces the amount they spend with shops and businesses.
This reduces demand in the economy, which puts less pressure on supplies of goods and services. This means that businesses may supply their goods and services at a lower price, or at least not raise prices as rapidly.
Inflation measures the prices of what households buy, so if prices are not rising rapidly, inflation is low.
Will my mortgage go up soon?
That depends on what kind of mortgage you have. If you have a tracker mortgage - the type that directly follows the base rate - you can expect your interest payments to jump pretty soon.
If you have a fixed-term mortgage, you will not start paying more interest until you have to remortgage when your current deal runs out.
Is there more to come?
The Bank said the UK could be nearing peak interest rates, and may have already reached it. Decision makers said they might raise rates again, but only if they see evidence of more persistent inflationary pressures.
Inflation has already started to fall from the 40-year highs it hit last year, and the Bank said it expects the measure to fall quickly this year.
Governor Andrew Bailey said that the committee had deliberately softened the language it used this time around as it no longer pledged to act "forcefully" to bring down inflation - but he added that it was "too soon to declare victory" over inflation just yet.
Did all decision makers agree?
No. There is a split in the committee. But rather than people wanting to hike rates further, the dissenters - there were two of them - wanted to keep them unchanged. They argued that the economy is weak as people's real incomes are falling.
They also said that the impact of recent rate rises have not filtered through yet - there tends to be a lag.
They argued that by raising rates much further the Bank would reduce inflation to well below its target rate, which would require it to reverse some of those decisions later down the line.
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