The Bank of England has made the decision to raise interest rates by 0.5 per cent today - bringing rates to their highest level since 2008.
It means the bank's base rate is now set at 2.25 per cent - up from 1.75 per cent. The bank hopes that raising interest rates will help curb rising inflation, which currently stands at 9.9 per cent but is soon expected to rise even further.
The Bank’s Monetary Policy Committee (MPC) came to the decision after five members of the nine-strong board voted for the 0.5 percentage point increase, including Governor of the Bank Andrew Bailey. Three members – Jonathan Haskel, Catherine Mann and Dave Ramsden – voted in favour of a 0.75 percentage point rise, while one member – Swati Dhingra – called for a 0.25 percentage point increase.
Read more: Manchester shoppers share their food waste saving tips amid cost of living crisis
According to the Bank of England, higher interest rates make it more expensive for people to borrow money, potentially encouraging them to save more. Overall, the goal is to make consumers spend less on goods and services, in turn, raising the price of those things and bringing a lower rate of inflation.
“Expectations of future inflation are still not where the Bank of England would like them to be,” said the Institute of Directors' chief economist Kitty Ussher. “Many of our members think that the peak will come next year, and so may price accordingly, running the risk that inflationary expectations become self-fulfilling.
“Combined with imminent announcements of a government stimulus package, plus some remaining – albeit smaller – upward pressure on CPI from household energy prices next month, the Bank of England has made the judgment that interest rates need to continue rising.
“However, the MPC also pointed to recent data showing the UK economy flatlining over the summer and early signs that labour vacancies may have peaked. This explains why most MPC members chose to raise rates at the lower end of market expectations rather than follow the US and eurozone and go for a higher 0.75 percentage point rise.
“The key question for the months ahead is whether inflation can be tamed without entering recession. With a Government determined to go for growth in a rising interest rate environment, that’s still all to play for.”
So what does this actually mean for consumers? If you have a loan or mortgage that charges a variable interest rate, then you will notice the costs of your repayment going up.
For example, if you have a £130,000 mortgage that you intend to pay off in 25 years at an interest rate of 3.5 per cent, then the monthly repayment will be £651. However, if the interest rate is 0.5 per cent higher, like it is now, the monthly repayment will increase by £35 to £686.
However, if you're on a fixed rate you won't see any changes to payments until the end of the fixed period. If you are currently paying off a mortgage, and are concerned about how your mortgage payments will be affected by the new interest rate, you can use this mortgage calculator to see how much more you may pay.
Those with other types of debts will also feel the strain of rising rates. Alice Haine, personal finance analyst at Bestinvest said: “Consumers borrowed an additional £1.4 billion in credit in July, a further jump on the increase of £1.8 billion in June – with half of that sum on credit cards alone – highlighting just how difficult the current environment has become.
“Anyone with an existing fixed-rate personal loan or car loan does not need to panic yet as the terms of their loan have already been agreed, but new borrowers shopping around for credit may find the cost of debt higher.
“Anyone with a small credit card balance they are struggling to clear should consider switching to a 0% balance transfer deal to buy themselves some breathing space. This gives them an interest-free period to pay back the debt at their own pace without the fear of the debt compounding out of control.”
Savers meanwhile may see some improvements to deals in the coming weeks. But Ms Haine said that with high inflation, “the real return on any cash sitting in a savings account will be deeply negative – no matter how great the headline rate is”.
She added: “With the best easy access accounts climbing to 1.95% this week and the best fixed-term accounts hitting 3.82%, every penny in additional interest will be crucial in the fight against high inflation, which eats away at our spending power. But it might be worth waiting a little while to let the latest interest rate rises trickle through from lenders to savers.
“While banks and building societies are quick to apply higher rates to debt, they can be a little slower to deliver the good news to savers.”
READ NEXT:
-
Bank of England announces highest interest rate since 2008 - with country already in recession
-
The workers getting a pay rise from today as Real Living Wage goes up
-
Cheapest petrol stations in Greater Manchester as fuel prices fall to lowest since mid-May
-
Experts issue 10 day warning to everyone with electricity meter
-
Expert tips on how to delay switching on central heating as winter approaches
