It has been confirmed that the Bank of England has increased interest rates in the UK by a further 0.25%, the hike marks the 5th increase by the Monetary Policy Committee as the bank attempts to keep rising inflation under control.
The rise this week will take interest rates to their highest since 2009, a 13 year high.
Back in May the interest rates were increased by 0.25%, a move which for some members of the MPC didn’t go far enough.
What does this mean for borrowers?
For those who are borrowers this does mean that with the base rate increase your high street lender, financial services provider could increase their interest rates. In terms of those whom have mortgages it could mean an additional £12pcm – £18pcm being spent on your mortgage.
For those with credit cards and loans the interest rate increase could still affect you.
Prior to the increase the average annual interest rate on bank overdrafts was 20.07% and 18.08% on credit cards. It is expected that some lenders will increase their fees in line with the interest rate increase.
The MPC said that the decision to increase the Bank Rate to 1.25% was due:
“In view of continuing signs of robust cost and price pressures, including the current tightness of the labour market, and the risk that those pressures become more persistent.”
It is expected that GDP (Gross Domestic Product), that is the standard measure of the value added created through the production of goods and services in a country during any certain period of time, will have slowed sharply in the first half of 2022. There are also concerns for the labour market with a 5.5% rise in unemployment expected within the next three years.
There is some slight good news CPI inflation is expected to average slightly over 10% at its peak in the 4th quarter of 2022.
Why are interest rates increasing again?
The ongoing war in Ukraine is certainly not helping. The war is having a major knock on effect on the price of oil and gas, something we are all noticing at the pumps as the UK and the wider EC region look to become less dependent on Russian Oil.
Some firms are also experiencing shortages of goods to sell and in some cases even if they have the goods to sell buyers are reluctant to make large purchases due to price increases.
With rising prices and more people borrowing money the way to control this is to increase interest rates.
However with rising interest rates comes the risk of slowing the UK economy down, something the Bank of England will want to avoid.
In 2008, the UK, along with the rest of world, experienced a major financial crisis and since then the interest rates have been at historically low levels. Last year they were as low as 0.1%.
Will interest rates increase furthers?
One of the major questions on a lot of borrowers minds and especially those with mortgages is how high will the interest rates go.
This months interest rate was expected, however there are some analysts who believe they could go up even higher, some believe this could be as high as 3%
This could happen if prices continue to increase as businesses look to maintain profits and workers demand wage increases to keep up with the cost of living.
Is it good news for savers?
In some respects the rise in interest rates is good news for savers.
However, for a lot of people the thought of putting even a few pounds and pennies away each month is a bridge too far given the steady increase in goods and services.
