The Bank of England has doubled interest rates to 0.5%, and the move will have a big impact on savers, homeowners and people taking out loans.
Members of the Bank's Monetary Policy Committee (MPC) today voted to raise 'base rate' from 0.25%.
The reason is that inflation is currently running at 5.4% - the highest level in more than a decade, and the Bank wants to drive that down.
The idea is that when base rate goes up, consumers and businesses are more likely to save and not spend.
In theory that slows the economy down and brings inflation down with it, but it has real-world impacts on households across the UK.
In short, savers will get more cash - but homeowners and borrowers will pay more.
The Bank of England decides every month if interest rates should rise, fall or stay the same.
In December 2021 the MPC raised the rate from 0.1%, where it remained for most of the pandemic.
Savings
Under normal circumstances, a rise in the base rate means the amount you earn on your savings will go up - but this is not always been the case.
Banks have always been slower to pass on base rate rises to savers than they are to hike mortgage rates - though they have been slow on both during the pandemic, to keep mortgages competitive.
But the base rate rising means more cash for savers when banks do pass it on.
For example, if you have £1,000 in a savings account paying 0.71% - the current easy access best buy - you’ll earn £7.10 in interest after a year currently.
If that account, from Investec, passes on the full 0.25 percentage point rise, that adds up to approximately £2.50 extra interest after a year.
The best one-year fixed rate bond pays 1.36% a year, from Zopa.
Deals paying that rate would pay out £13.60 a year in interest now for £1,000, and that will rise by another £2.50 if banks relay the base rate hike.
The problem is that no savings rate comes anywhere near beating inflation - at 5.4%.
Inflation erodes the spending power of all of our cash, but any savings do have to be kept somewhere and it makes sense to look for the best possible deals.
Mortgages
Mortgage rates are currently low, and banks have been reluctant to put these up even after the base rate rise in December 2021.
Tracker mortgage rates are linked directly to base rate so change almost straight away - though these loans are rare.
Most homes have fixed-rate mortgages, and rates on these are still low.
Moneyfacts said tracker mortgage prices rose from 3.38% in December to 3.53% last month.
But the average two-year fixed deal increased from 2.34% in December 2021 to 2.38% in January - just 4 basis points.
When lenders pass a 0.25 percentage point rise on, yearly payments for the average 25-year variable rate mortgage rise by £687 to £13,904.64.
A mortgage broker can help you find the most suitable deal for your circumstances and factor in true costs.
It’s important to not only think about headline rates, but also assess any additional fees that may be involved.
For homeowners with fixed deals expiring in the next six months, it could make sense to lock in to a low fixed-rate deal before rates rise further.
Most banks let you agree a new mortgage up to six months before your current one ends.
But for anyone with deals expiring mid-2022 and beyond, watch out for any early repayment charges.
You'll need to weigh-up whether paying an exit fee to remortgage early is financially worth it.
Loans and debt
Most personal loans are based on fixed rates, so if you have unsecured borrowing you should continue to repay it as agreed.
Credit card rates are variable, but not typically explicitly linked to the base rate, so won’t automatically go up.
Card providers can usually change rates as and when they want – recently, for example, American Express announced it would be charging its cardholders more, blaming the rising cost of offering rewards. They are already at a 23-year high.
Why do central bank interest rates go up?
Central banks, like the Bank of England, have tools to help them shape the country's economy.
One of these is base rate, a kind of super interest rate which all other financial firms tend to pay attention to.
Raising or lowering this rate helps control the growth of the economy, and therefore inflation.
Inflation erodes the spending power of money, and the theory is that raising base rate brings this under control by making it more expensive to borrow.
How does raising base rate bring down inflation?
This is because when the base rate is high, borrowing money is expensive. If a mortgage charges 2% interest and base rate goes up by 1%, the exact same mortgage will charge 3%.
When the base rate is low, borrowing is cheap - but savings rates are low, which means we are more likely to spend and not save. This means the economy grows quickly, but can mean inflation spikes.
