The Bank of England has hiked interest rates for the tenth time in a row, heaping further pressure on households.
The decision was taken to help keep inflation under control.
But why does this help inflation, and what might be to come further down the road?
– 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 Monetary Policy Committee (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.
That means they have less money left in their pockets by the end of the month, which 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?
The answer to this depends 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?
Perhaps. The Bank signalled on Thursday 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 begun 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.
