Interest rates are rising: what does it mean for you?
It comes as the cost of living crisis continues to hit hard
Last updated 29th May 2022
The Bank of England has announced that interest rates are on the rise again, after being raised to 0.75%.
This is the third time in four months that interest rates have gone up as the UK emerges from the COVID pandemic. Previously, the rate was raised to 0.5%, doubling from the previous rate of 0.25% in February.
While 0.25% might not sound like a drastic increase, the effect that the rate change will have for the cost of goods and services means that you might not get as much bang for your buck.
So, now that interest rates are on the rise again, what does the change mean for you and your wallet?
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 £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 - for example, Nationwide Building Society increased its Fix Rate ISA from 0.4% to 0.5%.
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.
Who is in charge of controlling the rates?
It is important to remember that interest rates are tied to inflation, which triggers price rises, and interest rates work together with inflation rates to see prices go up and down.
Inflation is when prices for goods and services rise over time. This results in all items from clothes and food to petrol and houses cost more than they used to. The rise in inflation is due to the an increase in production costs, for example a higher cost of raw materials and higher wages.
Additionally, a surge in demand for products and services can lead to a rise in inflation as consumers are willing to pay more. With the global economic coming out of lockdown at relatively the same time, demand for petrol, air travel, clothes, etc all went up across the world at the same time. This was ahead of producer’s capacity, as production levels have not reached pre-pandemic levels. This resulted in an increase in prices.
In order to try and stop the growth of inflation, the Bank of England - which regulates and controls the value of the pound - has had to increase interest rates.
Why is the change in rates needed?
It is the Bank of England’s job to control inflation. The bank had set a target of 2% inflation a year, as this increase would hardly be felt by the average consumer. However, the bank has warned that inflation could reach 7% by the end of the year - the highest since March 1992.
The most effective way to control inflation historically has been to increase interest rates. Interest rates, also known as the cost of borrowing, increases the cost of money and as such businesses and individuals are less likely to get into debt and reduce their spending.
As well as this, a raise in interest rate encourages saving, as savers receive more interest on their savings. All this is done to reduce spending and deflate economic activity.