Interest rate rise: What 4.5% increase means for YOU

Interest rate rise: What 4.5% increase means for YOU as consumers face more cost-of-living pain

  • Here is how the possible rise in interest rates by Bank of England may affect you 

The Bank of England is set to push interest rates up to 4.5% amid the ongoing cost-of-living crisis.

Markets have priced in a 0.25 percentage point increase to 4.5 per cent, which will reach a 15-year high.

It would be the 12th consecutive bump in the base rate, and a peak since 2008, before the credit crunch sent the level tumbling.

How exactly will you be affected by a rise in interest rates? How do interest rates actually work? How high could interest rates go?

Interest rates have continually been raised by the Bank of England since December 2021

How does the interest rate rise affect me?

The current interest rate – also known as the Bank rate – could be increased again in an attempt to control inflation, which has gone above 10% due to the soaring cost of living. 

Around 2.2million people with variable rate mortgages will face immediate increases in their bills. However, MPs have criticised the biggest high street banks for dragging their heels over passing on the benefit to loyal savers. 

While mortgage-payers suffer spiralling costs, rising rates have offered some benefits to savers. Banks have also been criticised for failing to pass on the higher interest levels. 

With just under one in three people having a mortgage in the UK, their monthly repayments may increase yet again. 

The majority of people with a mortgage hold a fixed-rate type, meaning that the cost of their monthly payments may not change immediately. 

However, house buyers and people seeking to remortgage their property will have to pay much more now than they would have done a year ago. 

How do interest rates work?

An interest rate indicates how high the cost of borrowing is, or how high rewards are for anyone with money in a savings account.

The Bank Rate sets the amount of interest paid to commercial banks, which in turn influences the rates they charge customers for borrowing, or pay them for saving. 

This  graph illustrates how the Bank of England is expected to end its hike on interest rates, which increased every month from December 2021

For borrowers, the interest rate is the amount you are charged for borrowing money, shown as a percentage of the total amount of the loan. The higher the percentage, the more you have to pay back on your loan.

If you’re a saver, the savings rate tells you how much money will be paid into your account, as a percentage of your savings. The higher the savings rate, the more money will be paid into your account.

Whilst a rise of 0.25% by the Bank of England may not sound like much, it could have a big impact on borrowers. 

How high will the interest rate rise?

Interest rates have continually been raised by the Bank of England since December 2021, with another hike set to be announced. 

With inflation levels – which chart the cost of living – still at 10.1%, there is uncertainty over whether interest rates will continue to rise, but some economists predict that rates will begin to stabilise. 

Ellie Henderson, from Investec Economics, said the ‘clock is ticking’ on the Bank’s monetary policy tightening cycle, and an increase on Thursday could be the last.

This graph illustrates the alarming rise in interest rates since the end of 2021, which have not been helped by the rise in inflation due to the soaring cost of living

She said: ‘As things stand and considering the sharp downward influences on inflation in the coming months, namely from energy but also from cooling food and goods price inflation, we suspect that this could be the last hike by the Bank of England in this cycle.’

But she said there is still a ‘high chance’ the Bank will decide to lift rates by 0.25 percentage points again in June, especially if inflation remains stubbornly above target.

‘What is clear is that the days of successive interest rate hikes in this economic cycle are limited, but the exact endpoint is clouded with uncertainties.’

The European Central Bank (ECB) also opted for a 0.25 percentage point increase but left the door open for further increases, with president Christine Lagarde saying ‘the inflation outlook continues to be too high for too long’.

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