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Interest rates: How the Bank of England’s decision affects you and your money

  • By Kevin Peachey
  • Journalist’s living expenses

The Bank of England has kept interest rates on hold for the third time in a row after 14 consecutive increases.

The Bank’s interest rate set by the Monetary Policy Committee will remain at 5.25%.

Another round of holdings could bring relief to homeowners who have seen mortgage rates rise but savers are unlikely to see an increase.

When can interest rates decrease?

Bank interest rates are currently at their highest level in 15 years.

The theory is that rising interest rates make borrowing more expensive, meaning people will have less to spend, reducing demand and inflation.

Interest rates have increased 14 times in a row since December 2021 as the Bank tries to bring inflation closer to its 2% target.

According to the Office for National Statistics (ONS), prices rose 4.6% in the year to October. This was slower than the rise a month earlier and also down from a peak of 11.1%. in October 2022.

Although this figure is still more than double the Bank’s target, the decline influenced the Bank’s decision to pause interest rate increases. The latest decision was divided, with six of the nine committee members voting unchanged.

Policymakers will closely monitor the rate of “core inflation” – a measure that strips out volatile factors such as food and energy.

The chances of interest rates actually starting to fall again look slim before next summer.

At one point, interest rates in the UK were expected to rise above 6%, but that peak is now expected to be lower, even if there is a subsequent rise.

Banks must balance the risk of damaging an economy that shows little sign of growth with the need to slow price growth.

How do interest rates affect me?

When interest rates rise or fall, more than 1.4 million people on standard variable rate (SVR) and tracker deals often see their monthly payments change immediately.

Despite the pause in increases, compared to December 2021, tracker mortgage holders are still paying £540 more per month and those on an SVR are paying £299 more per month.

Around three-quarters of mortgage customers hold fixed-rate deals. Lenders can now confidently reduce mortgage interest rates, although they are still much higher than they have been for the past 10 years.

Relatively high interest rates mean homebuyers and mortgage holders will pay more if they took out the same mortgage a year or more ago.

As people roll out cheap fixed-rate deals for much higher-interest products, monthly repayments can soar by hundreds of pounds. Banking trade body UK Finance said around 1.6 million deals will expire next year.

You can see how your mortgage could be affected by using our calculator:

Bank of England interest rates also affect the amount charged on credit cards, bank loans and car loans.

Lenders may decide to increase interest rates if they expect higher interest rates from the Bank of England in the future.

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Low interest rates are good for borrowers but bad for savers

Private banks and building societies have come under pressure to pass on higher interest rate increases to customers.

There have been some good deals on the market, so analysts say customers should shop around, as many accounts will pay little or nothing.

Why have prices increased?

Inflation is relatively high around the world, after Covid restrictions were eased and consumers spent more.

Many companies have difficulty finding enough products to sell. Oil and gas prices are also higher than before – a problem made worse by Russia’s invasion of Ukraine.

While many of the factors causing inflation are global, there are also domestic factors that affect the UK, including rising wages.

Will other countries raise interest rates?

Interest rates have been rising worldwide, although in recent months other central banks, including the US Federal Reserve and the European Central Bank, have also paused interest rate hikes.

The UK has one of the highest rates in the G7 – a group of seven of the world’s largest so-called “advanced” economies.


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