Interest rate rises may be good for savers, but for borrowers and mortgage holders, not so much.
And even then, banks are often much quicker about applying interest rate hikes to mortgage repayments than rewarding savers by doing the same on their saving accounts.
There could be more bad news for mortgage payers as the Bank of England (BoE) announced it has increased interest rates to their highest level in nearly three decades on Thursday.
Decisionmakers on the bank’s Monetary Policy Committee (MPC) have increased the base interest rate from 1.25% to 1.75%.
Given there were three members of the MPC who wanted a faster rise in June when the decision was taken to take interest rates to 1.25%, it seemed a dead cert they would go up again.
It is now the biggest single interest rate hike since 1995.
What are interest rates?
Interest on a loan or mortgage is what a borrower pays on top of what they have been loaned, acting as a profit to the loanee.
The higher the interest rate, the more it will cost to borrow money.
But on the other hand, if an interest rate is high, the reward for saving is greater as banks and building societies are likely to pass on the interest rate to those depositing their cash.
The percentage quoted is typically worked out over an annual basis, often known as the annual percentage rate (APR).
Lenders can charge what they want as interest but a base rate is set by the Bank of England.
This rate is then often followed by the majority of high street banks.
Why is the Bank of England putting up interest rates?
Interest rates rises are designed to slow down inflation - an economic word for the rate at which the prices of goods are increasing.
The higher inflation is, the less far your money will go.
One of the main markers of inflation, the Consumer Price Index (CPI), currently puts it at 9.4% and there have been terrifying predictions that inflation could hit 15% by early 2023.
Since the financial crash in 2008, interest rates have been at rock-bottom, making it a great time to have borrowed as very little interest needed to be repaid on loans.
However, the global easing of coronavirus restrictions and the war in Ukraine has sent inflation across the world rocketing.
Gas prices are expected to be around 50% higher this winter than they were following the full-scale Russian attack on Ukraine - a huge factor in the soaring inflation.
With energy vital for the production of goods and foods, the rising gas prices have had a massive knock-on effect on the price of items on shop shelves.
Federal reserves around the world are putting up interest rates in the hope of dampening inflation and the BoE is trying to do likewise.
According to the BoE, higher spending pushes inflation up so interest rate hikes are designed to counter that by making borrowing-to-spend more expensive and saving more profitable.
The central bank has very few tools for controlling inflation so it tends to have to resort to the one lever it can pull, and that is sticking interest rates up.
Mortgages, loans, overdrafts and even credit cards are set to become more expensive as a result.
When will interest rates go down?
Given the Resolution Foundation, a political think tank that studies social issues, believes inflation could hit 15% in the first quarter of 2023, interest rates are unlikely to come down until that number is significantly lower.
In fact, some experts predict there could be another six months of interest rate rises to contend with before inflation is closer to the BoE’s 2% target.
Yael Selfin, the chief economist at KPMG UK, told The New Statesman: “It generally takes about 18 months for interest rates to influence inflation.
“Our expectations at the moment are for another rise in September, one in November and another one in February, and then potentially a pause, because by that stage we should hopefully see inflation starting to moderate quite significantly.”
Interest rates in the UK could top out at up to 3% by early next year, some economists have predicted.
Once inflation has plateaued and started to dip, that could give scope for the MPC to look at lowering the rate.
