UK interest rates rose from 0.5% to 2.25% on September 22 in an attempt by the Bank of England (BoE) to temper soaring inflation, putting it at its highest level since the global financial crisis of 2008.
The decision by the institution’s Monetary Policy Committee (MPC) was widely expected but had to be delayed out of respect for the late Queen Elizabeth II and the ensuing period of national mourning.
Now, after the Chancellor’s new tax cuts sent the pound plummeting, the BoE has issued a statement saying it ‘will not hesitate’ to raise interest rates even further.
Many analysts thought the Bank’s monetary policy committee might hold an emergency session to stabilize markets, but Governor Andrew Bailey instead indicated they would meet in November as scheduled.
He said the committee would carry out a full assessment of the impact of inflation and the fall in the pound sterling at their scheduled meeting in November and then “act accordingly”.
“The MPC will not shy away from changing interest rates as much as necessary to sustainably bring inflation back to the 2% target over the medium term, in line with its mandate,” he said.
Earlier in September, the Office for National Statistics revealed that the CPI inflation rate fell to 9.9% in August from 10.1% in July.
Although experts predicted that the figure would remain unchanged in August, downward pressure was put on the inflation rate by lower fuel prices.
Here’s a quick and easy guide to how changing interest rates will affect you.
What are the interest rates?
An interest rate is a measure that tells you the cost of borrowing or the benefits of saving.
If you borrow money, usually from a bank, the interest rate on that money is the amount you will be charged to borrow it.
This is a charge that is added to the total loan amount and will be shown as a percentage of the total.
Higher percentages mean paying more money to the lender to borrow money.
If you save money in a bank account, the interest rate on that money is the amount you will accumulate on top of your savings. Banks will pay you a percentage of your total savings, usually at the end of the year.
How do interest rates affect inflation?
This in turn has an effect on the price of goods.
When interest rates are low, people can spend more and this can cause retailers to raise the price of goods.
When rates are high, demand can drop as people put more money into their savings pots. This, in theory, should lower the prices of goods and services.
However, the rise in prices is not the direct result of changes in interest rates. Other factors, including money supply and underlying costs, affect prices and cause inflation.
Interest rates can only help manage inflation.
How do interest rates affect mortgage rates?
Changes to the BoE’s base rate, which is the interest rate at which high street banks borrow from Threadneedle Street, have a knock-on effect on the interest rates the former then set for their mortgage borrowers.
How does this affect me?
Interest rate changes will affect anyone with savings and anyone who borrows money from banks, for example for a mortgage.
It will also have a wider effect on the economy. By raising the base interest rate, the BoE hopes to temper the surge in inflation and contribute to the cost of living crisis.