The Bank of England just hiked interest rates again to 4.5% in a move which could have a significant impact on your finances.
This is the 12th time in a row that the central bank has hiked rates in an effort to combat record-high inflation.
While it may seem like a small(ish) increase, going from 4.25% to 4.5%, that the highest rate seen for almost 15 years. Here’s why that matters.
What are interest rates?
Interest rates tell you how expensive it is to borrow money at the moment – or how high the reward for saving is.
It’s widely perceived as a means to understand how the economy is doing at the moment.
The Bank of England’s Monetary Policy Committee controls the Bank Rate, which is the main interest rate in the UK.
Other banks then change their own interest rates in line with the Bank.
Why have interest rates gone up?
The Bank Rate is used by the Bank to control the inflation rate, which the government wants to be at 2% – but as of March 2023, the inflation rate was still at 10.1%.
Inflation is the measure of how prices have altered over the last 12 months.
If interest rates are high, then the general public usually spend less, meaning inflation has to come down.
But inflation rates have now been high for some time, which is why the Bank just unveiled its 12th successive increase to interest rates.
Back in December 2021, the Bank had interest at 0.1%, but prices began to spiral after the Covid lockdowns started to lift – a situation only exacerbated by Russia’s invasion of Ukraine.
This caused energy prices to surge and inflation to follow suit.
Now, groceries are at their highest price for the last 45 years and interest rates are at a level not seen since the 2008 financial crash.
What do higher interest rates mean for you?
Mortgages
If you are a homeowner, your monthly repayments are likely to increase, particularly if you have a variable mortgage deal or you have a new fixed deal secured over the last 12 months.
Only those with a fixed rate mortgage might not face the immediate consequences.
Research from TotallyMoney and Moneycomms said a 0.25% increase would add £26 to monthly repayments for people with an average UK property costing £270,708, if they have a 75% loan to value ratio.
Credit and loans
Much like those with mortgages, higher rates will mean your repayments go up unless you’re on fixed rates.
Savings
Those with savings will actually benefit as banks and building societies do pass the higher interest rates onto customers.
But, the value of your savings are also eroding in real terms because they’re not keeping up inflation levels.
What next?
The inflation rate for April is yet to be announced, but there’s hope that it will show how energy prices and fuel prices are significantly lower than they were a year ago.
Some economists believe that the energy price change alone will bring inflation to 8% for April – but that doesn’t mean the cost of living crisis will come to an end.
As Sky News reported, the Bank is formally expected to increase its forecasts for economic growth as it no longer expects the UK to go into a recession this year.
The next interest rate won’t be decided until 22 June.