The Bank of England has hiked interest rates to 3% - its highest rate in 14 years. The bank announced it was increasing rates from 2.25% to 3% on Thursday in a bid to curb soaring inflation and the ongoing cost of living crisis.
The increase means rates are now at their highest rates in 14 years and the .75% rise is the biggest single increase since 1989. It is also the eighth time in a row that the Bank has hiked interest rates after the rate of Consumer Price Index inflation rose to 10.1% in September, up from 9.9% in August. However it said on Thursday it expects inflation to fall sharply from the middle of next year.
Interest rates have been seeing increases since last year after being historically low - around 0.1% this time last year - after the 2008 crisis and the latest change will pile further worry on those with mortgages who could face paying hundreds of pounds more in costs as a result.
Read more: All the cost of living payments you can get in November as food inflation soars
The bank has also warned that the UK faces what may be the longest period of recession for more than a century since reliable records began. It expects the economy could shrink for eight consecutive quarters - equivalent to two years. However it says that the 2.9% contraction in economic activity expected during that time is expected to be milder than that 6.4% plunge after the 2008 financial crisis - although more spread out.
Here's what you need to know about interest rates, how the increase affects you and how high rates could go.
How will rising interest rates affect me?
The biggest impact of rising interest rates will be for the roughly 33% of people in the UK who have mortgages. Increasing the base rate of interest means that many on tracker and variable deals often see an almost immediate increase in their monthly payments as they are set against this base rate. In September the Bank of England raised interest rates in from 1.75% to 2.25% – the seventh rise since December 2021 and the highest they've been in 14 years. This had an almost instant impact on those with tracker deals, with t he Financial Times using an example that a tracker rate rising from 3.5% to 4% would cost almost an extra £60 a month on a £200,000 loan.
Financial journalist Martin Lewis spelled out the huge impact this could have on your finance s in a recent MoneySavingExpert newsletter where he said: “For each one percentage point your mortgage rate increases, expect to pay roughly £50 more a month (£600/year) per £100,000 of mortgage debt.” He added that rising rates “will likely push millions renewing when their fixes end into 'can't pay my mortgage' territory”.
Increasing the base rate further to 3%, as the Bank of England has done today, is likely to have a similar - and in some cases severe - impact on household finances. While some have assured it won't have any impact on current fixed mortgage rates being offered by banks as these expected base rate rises have already been factored in, those on a typical tracker mortgage could pay about £73.50 more a month while those on standard variable rate mortgages would face a £46 jump.
People with fixed deals will not be immediately affected but any new deals are likely to be more expensive with lenders anticipating higher rates. That means new house buyers - or anyone seeking to remortgage - will also have to pay more.
Will increasing rates actually help inflation?
Raising interest rates help to control inflation by making it more expensive to borrow money, and encouraging people to spend and borrow less and save more. But there is disagreement among economists and financial experts on how much increasing interest rates will actually help tackle inflation.
Craig Fish, managing director at mortgage broker Lodestone, told the Financial Reporter that the bank needed a new approach and to forecast at what might happen in the future rather than using interest rates to tackle price rises. "The issue we have is that the inflation is caused by worldwide events that are completely beyond our control," he said. "It is not caused by the overstretched households of the UK going on a spending spree. They simply don't have the money available to do so.
"We need a new approach and some fresh thinking to try and find new ways to tackle an age old problem. Stop looking at historic data and handling things in the same way over and over again, because look at the mess we are in right now. Why not look to the future and start trying to predict where you see the economy going and act accordingly? We are facing a recession and increasing rates is only going to deepen the problems that will come from that."
The trade union Unite has warned higher interest rates will drive more workers into debt. The union's general secretary Sharon Graham says their research showed many workers "face unsurmountable financial pressure" after a poll for Unite of 6,000 adults showed that more than half (54%) say they can’t or will have difficulty paying their household bills this year. Almost a third (27%) have already gone into debt or increased the levels of their debt just to put food on the table.
Ms Graham said: "Unite’s research shows that many workers face unsurmountable financial pressure. An interest rate hike will shackle those workers with more debt while corporate profiteering runs rampant.”
Price increases are also being impacted by other factors such as the volatility of the pound, general market uncertainty and the Ukraine war. In the UK much will rest on the government's upcoming autumn statement on November 17, which will set out its economic policies going forward across key areas like taxes, spending, benefits and pensions. Given the market turmoil surrounding Liz Truss' calamitous mini-budget in September, new prime minister Rishi Sunak and his chancellor Jeremy Hunt will be under more pressure than ever to deliver a package which helps those hardest hit by the cost of living crisis and also satisfies the markets.
How high could rates go?
This is difficult to answer. Rates have gone up considerably in the past year and experts expect them to rise further with analysts suggesting rates could reach 4.75% next year, although that peak is lower than a few weeks ago after the government's disastrous mini-budget caused turmoil in the financial markets. The Bank confirmed on Thursday that the cost of living will be much higher than the central bank’s 2% inflation target next year.
But the bank remains under pressure to put rates up as current predictions show huge price rises across items like energy and food - food inflation soared to a record 11.6% in October. Giving its update on Thursday it said: "We expect inflation to fall sharply from the middle of next year. The price of energy is not expected to rise so rapidly. The government has introduced a scheme that caps energy bills for households and businesses for six months.
"We don’t expect the price of imported goods to rise so fast as some of the production difficulties that businesses have faced are starting to ease. The slowdown in demand for goods and services should also put downward pressure on prices."
However it warned there were "considerable uncertainties around the outlook" for the economy and added: "The Committee continues to judge that, if the outlook suggests more persistent inflationary pressures, it will respond forcefully, as necessary."
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