We have a target of keeping the rate of inflation at 2%. It’s higher than that at the moment. This higher rate of inflation is largely due to the effects of the Covid pandemic on the economy. Many of the things that are causing it won’t last.
The main tool we have to influence inflation is interest rates.
In December 2021, we raised the UK’s most important interest rate (Bank Rate) from 0.1% to 0.25%. Doing this will help bring the rate of inflation down.
It will take time to work. We expect the rate of inflation to reach around 6% in the spring. But increasing interest rates now will help make sure inflation falls back to our 2% target by the end of 2023.
Will interest rates keep going up?
We may need to raise interest rates again over the next few years. But any increases are likely to be small. We are not going back to the very high interest rates that people experienced in the 1980s.
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 go 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 0.15% higher – the amount by which we have raised Bank Rate- the monthly repayment rises by £10 to £593.
If you’re on a fixed rate you won’t see any change until the end of your fixed period. Some people may even find their rate drops when their fixed rate period ends.
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.