The Bank of England has just increased interest rates again from 3% to 3.5%.
The decision comes after the most recent meeting of the Monetary Policy Committee (MPC).
It’s also the ninth consecutive increase since December last year, which has taken the rate to its highest level since 2008.
But what does that actually mean for your finances? Here’s what you need to know.
What are interest rates?
This is the amount you have to pay to borrow money, and how much your bank pays you for saving up your money with them.
It’s also widely seen as a sign of how well the economy is doing, and is presented as a percentage of the amount you borrow or save over the year.
The Bank of England’s Monetary Policy Committee controls the Bank Rate, which is the main interest rate in the UK.
The committee was reportedly split six to three on the decision.
The Bank Rate is used by the Bank to control the inflation rate, which the government wants to be at 2%.
Other banks normally change their interest rates in response to the BoE, but there are other factors involved which might mean different local banks adopt different rates. For instance, banks need to pay less on savings than they make on lending.
Why are interest rates important right now?
The reopening of the global economy after the Covid lockdowns and the Ukraine war (which has limited energy supplies) have sent inflation rates around the world soaring.
Inflation in the UK is currently at a 40-year-high of 10.7%.
But, if interest rates are high, then it discourages people from spending as much.
The Bank already increase its rate from 2.25 to 3% in November, the biggest single increase since 1989.
The UK is not alone in introducing this change – the US, Canada, Japan, the Eurozone have all increased their interest rates too.
What does this mean for your finances?
Mortgages
The government’s English Housing Survey has said that just a third of households have a mortgage. This news means all of those homes’ monthly repayments are likely to soar.
The Bank believes around four million household will have to pay more in their monthly instalments next month as a result.
So, for a typical tracker mortgage, payments would increase by £49 per month and for a standard variable rate mortgages would increase by £31.
But, around 75% of mortgage customers have a fixed rate mortgage, meaning monthly payments may not change instantly.
There is still a huge contrast between mortgage rates now and last year though. Before December 2021, average tracker mortgage customers would be able to pay £333 less per month, while variable mortgage holders could pay around £210 less.
Credit and loans
The annual interest rate average only in October soared to 20.73% on bank overdrafts, and 19.31% on credit cards.
With this latest hike in interest rates from the Bank of England, lenders might increase their own interest rates too.
Savings
Those with savings may be the only winners in this situation.
Banks and building societies pass higher interest rates onto customers, with deals better than have been seen in years.
However, the value of their savings are eroding in real terms because they’re not keeping up inflation levels.
Will they go any higher?
The rates are expected to continue rising as the cost of living crisis continues.
The Bank has admitted: “There are considerable uncertainties around the [forecast economic] outlook. The Committee continues to judge that, if the outlook suggests more persistent inflationary pressures, it will respond forcefully, as necessary.”
Some economists believe rates could reach 4.5% by mid-2023, although that’s still a decrease from huge earlier predictions straight after the disastrous mini-budget.
The Bank of England previously warned that the rate will reach 5.25% by the third quarter of 2023 – although that would cripple growth.
Inflation for November did decrease slightly from 11.1% to 10.7% – but that is still significantly higher than the target rate of 2%.
For context, interest rates in the UK were much higher before the financial crash of 2008.
The pandemic saw interest rates drop to a historic low of 0.1% – then the Bank started to increase it at a rapid speed, as inflation kicked in.