Interest rates now at highest level since 2008 after 0.5% increase
It's the highest interest rate the UK has had since the financial crisis
Last updated 22nd Sep 2022
The Bank of England has increased interest rates to their highest level since 2008.
The Monetary Policy Committee (MPC) has increased rates by 0.5 percentage points to 2.5%.
It's the highest interest rate the UK has had since the financial crisis, the last time the rate was above 2% was in 2008.
UK already in recession?
The committee indicated it believes the economy is already in recession.
The central bank had previously projected the economy would grow in the current financial quarter but said it now believes Gross Domestic Product (GDP) will fall 0.1%.
It comes after a reported 0.2% fall in GDP in the second quarter and would mean the economy is currently in recession.
A technical recession is when the economy shrinks for two quarters in a row.
What does the interest rate rise mean for us?
Interest rates tell us how high the cost of borrowing is, or how high the rewards are for saving.
So now interest rates have increased, you're likely to be charged more for borrowing money, for example, a mortgage or paying on a credit card.
If you're a saver, the rate impacts how much money you'll make from your savings.
Now rates are higher, the savings rates will be higher and people will make more from their savings
Why has the interest rate gone up so much?
The decision to hike interest rates is a bid to keep inflation under control.
It is the best tool that the Bank of England has to steer inflation – currently at 9.9% – back to its 2% target.
In the September meeting, the MPC also said inflation is now not due to soar as high as previously expected after Government announced plans to freeze energy prices for households earlier this month.
Consumer Price Index (CPI) inflation is now set to peak at “just under 11%” in October. This would mark the highest inflation the UK has witnessed since January 1982.
Cost of Living Crisis
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.