This page was last updated on 17 June 2022
Why have interest rates gone up?
We’ve put up interest rates up to help bring inflation back down. It will take time to work.
The cost of living has risen sharply over the last year. The speed of that increase is called the rate of inflation.
It’s our job to keep the UK’s rate of inflation low. We have a target of 2%. It’s higher than that at the moment. That’s mainly because of two things:
- higher prices of goods coming from abroad
- large increases in the cost of energy
But there is also increasing pressure on prices from developments at home. These include:
- there are more job vacancies than there are people to fill them, which means employers are having to offer higher wages to attract job applicants
- businesses are charging more for their products
That’s why we’ve raised interest rates several times over the past few months.
Since December 2021, we’ve increased our key interest rate, Bank Rate, from 0.1% to 1.25%.
But it will take time to work. It’s likely that inflation will keep rising this year and start to come down next year. We expect it to be close to our 2% target in around two years.
How high will interest rates go?
We will take the actions necessary to bring inflation down to 2%. This is the target the Government has set us.
Precisely where interest rates will go depends on what happens in the economy and what we think will happen to the rate of inflation over the next few years.
So we can’t say now exactly how high they will go. But they are not likely to reach the very high levels that some people experienced in the past.
We review how the economy is doing and whether a change in interest rates is needed eight times a year (roughly every six weeks).
How will interest rate rises affect me?
If you have a loan or mortgage that charges you a variable interest rate, you might find that the cost of your repayments goes up.
Say you have a £130,000 mortgage that you want to pay off over 25 years. If the interest rate on the mortgage is 2.5%, the monthly repayment will be £583.
But if the interest rate is 0.25% higher – the amount we raised Interest rates in June 2022 – the monthly repayment rises by £17 to £600.
If you’re on a fixed rate you won’t see any change until the end of your fixed period.
It’s important to understand how a change in interest rates could impact your ability to pay. You can use a mortgage calculator to work out how your monthly payments might be affected.
If you have savings in a bank account that pays interest then you might see interest rates on your savings go up.
How does an interest rate rise help bring inflation down?
When Bank Rate goes up (or down), it affects all the other interest rates in the UK, so it is a very important ‘benchmark’ interest rate for the economy as a whole.
Higher interest rates make borrowing more expensive and encourages saving. Both of those things reduce how much people spend overall. This helps to push inflation down.
But higher interest rates don’t work straight away. They take time to take full effect. So when we use them, we always look at what will happen in the economy over the next few years, not just what’s going on now.
The action we take to keep inflation low and stable is called monetary policy.
Since December 2021, we have increased our interest rate from 0.1% to 1.25%.