Bank of England raises interest rates again
This is the fourth straight increase the Bank has announced this year
Last updated 29th May 2022
The Bank of England (BoE) has voted to raise interest rates by 0.25% from today.
Members of the BoE Monetary Policy Committee increased interest rates from 0.75% to 1% in a bid to control inflation. This is the highest level of interest rate for 13 years.
The BoE is trying to tackle rising inflation, which reached a 30 year high of 7% in March this year. Inflation is, however, predicted to increase significantly by the end of the year when the energy price cap is revised once again.
As households and businesses across the country feel the pressures of the cost of living, many will reduce their spending. Andrew Bailey, the Governor of the BoE, has warned the Bank is “walking a very tight line” between tackling inflation and avoiding a recession.
Historically low levels
Paul Johnson from the Institute for Fiscal Studies has warned of the impact on people’s mortgages a rate increase will have. Mr Johnson said: “We are still at historically staggeringly low levels of interest rates," he told Radio 4's Today programme.
"So you look at it that way and think one quarter of a percent, half a percent, still a very low level, that doesn't look very dramatic.
"On the other hand, of course, if you've got a mortgage and it goes up by half a percent or 1% proportionally that's a very big increase.
"That could be doubling your mortgage interest payments over a period of time, so even small changes now, at least down the line once people certain fixed rates run through, could have really big effects on people who have got significant mortgages."
What does the rise in rates mean for you?
Mortgages
The first thing to remember is that almost all debts are set against the Bank of England rate. If the bank raises rates, all debts you have become more expensive. Your mortgage payments will increase, credit payments debt will increase, your car loan will increase. Virtually all debts you have will increase.
The increase in rates means for someone with a £250,000 mortgage on a variable interest rate will pay £384 more in mortgage repayments. That works out to an additional £32 pounds a month.
Loans
Additionally, if someone has a credit card loan of £8,000, an increase in Bank of England rates of 0.25% will result in an increase of £20 a year.
Savings
The good news is that if you’re a saver you will receive a higher interest payment from your bank.
Some banks have already increased their saving deposit rate with some offering Fix Rate ISA of 1%.
As the cost of living crisis continues to hit families hard, those who are struggling will feel the worst effects of the change, as wages continue to remain steady.
Cost of Living
Interest rates and inflation go up
Inflation rose by 8.8% in the 12 months to January 2023, down from 9.2% in December 2022. With interest rates also rising to 4%, those saving money will earn more interest on their finances, whilst those paying mortgages would pay more interest to the bank.
Energy bills
The price of energy went up incredibly as the cost of living crisis hit, with the gas price spike caused largely by the war in Ukraine. The price cap - which is set by an independent regulator to help offset costs onto customers - was set to rise to £3,549 for an average home in October but a price freeze from the government restricted the typical bill to £2,500. That's still an increase of 27% from the previous energy cap and as it's a cap on unit cost, the more energy you use the higher your bill will be.
Food prices
The cost of a weekly shop also has gone up as a result of the cost of living crisis. As a result of the war in Ukraine, a number of products including cooking oils and wheat have been disrupted. This means that several products are now considerably more expensive, driving bills up for customers.
Prices at the pumps
The average cost of petrol has also rose to unprecedented levels. Supply lines for petrol have been thrown into doubt as a result of the war in Ukraine, as Russia is a large export partner for gas, oil and fuel. In April 2022, the average price for a litre of petrol on the forecourt was 160.2p, whilst a litre of diesel would cost 170.5p. By late June 2022 the price had risen to an average of 190.9p for a litre of unleaded and 198.9p for a litre of diesel. In March 2023 the price wass on average of 147.03 in petrol and 167.04 in diesel.
Average cost of filling up a car with petrol hits £100
On 9th June 2022, the average cost of filling up a car with petrol hit £100 for the first time ever. Diesel had already hit that milestone. It comes as the cost of fuel hit a record high of one pound eighty a litre. The 2p rise was the biggest daily jump in 17 years. Prices have dropped by at least 20p per litre since the high point.