LONDON (Parliament Politics Magazine) – The Bank of England is set to announce its most recent interest rate decision on Thursday, and it is widely anticipated that they will increase rates for the sixth consecutive time.
Currently, interest rates are 1.25 percent. These could be raised to about 1.75 percent by the central bank. It would be the highest level since December 2008 in case this happens.
The Bank intends to decelerate the rate at which the prices are soaring. It has issued a warning that inflation may surpass 11% this year.
Why does a rise in interest rates contribute to reduced inflation?
Worldwide prices are rising significantly as Covid limitations are loosened and consumer spending increases.
Many businesses struggle to purchase enough inventory to sell. Additionally, more buyers are chasing too little goods resulting in price rise.
As a result of Russia’s invasion of Ukraine, oil and gas prices have also increased dramatically.
Raising interest rates is one method for attempting to control rising prices – inflation.
This results in increased cost of borrowing which encourages people to borrow more and spend less. It also encourages people to practise saving more.
The Bank, however, must strike a difficult balance because it does not want to overly impede the economy.
The UK has seen historically low interest rates ever since the global financial crisis of 2008. They were only 0.1 percent last year.
To what level can the interest rate rise?
Although additional hikes are anticipated later in the year, several analysts have predicted that UK interest rates will jump this month.
The Bank will ultimately need to raise rates to 3 percent, according to Capital Economics analysts, while some economists believe this won’t have to be this high. According to Pantheon Macroeconomics, interest rates will reach their peak at 1.75 percent.
The Office for Budgetary Responsibility (OBR), the independent economic adviser of the government, examined the potential consequences of greater and more persistent inflation in the UK last year.
This could happen when consumers believe that price increases will continue –Â businesses increase prices in order to maintain a profit, and employees seek pay rises in order to keep up.
The OBR said that UK interest rates might reach 3.5 percent if this happens.
How will I be affected by the rise in interest rates?
Loans and credit cards
Changes in interest rates could still have an impact on you even if you don’t have a mortgage.
The interest rates imposed on things such as credit cards, car loans and bank loans are also influenced by the Bank of England.
Even before this most recent increase, the average annual interest rate for bank overdrafts was 20.23 percent and for credit cards it was 18.56 percent in June. Given the rise in interest rates, lenders can choose to increase these fees.
Mortgages
The English Housing Survey, one of the most comprehensive guidelines known despite its geographic limitations, says just under a third of households have mortgages.
Three-quarters of them have fixed mortgages, so they won’t be immediately affected. The remaining – around two million people – will have their monthly repayments raised.
Those with a typical tracker mortgage will pay roughly £52 more per month if rates do rise to 1.75 percent. There will be a £59 increase for those with standard variable rate mortgages.
This hike comes after others that followed recent rate increases.
Customers with tracker mortgages could end up paying an additional £167 per month compared to pre-December 2021, and those with variable mortgages could be paying some £132 more.
Savings
The interest rates consumers receive on their savings are also affected by decisions made by the Bank.
Savings accounts receive a larger return on their investments when individual banks pass on interest rate increases.
However, interest rates are not keeping up with rising prices for those who are saving money.
