Interest rates are expected to rise Thursday as the Bank of England struggles to dampen rising inflation.
Base inflation has been at its highest level for 13 years after the Bank raised it to 1 percent.
On May 6, the institution’s Monetary Policy Committee decided to raise the key rate from 0.75 percent to 1 percent, the fourth time in a row that the panel has voted in favor of a rate hike.
The commission is now expected to raise interest rates even further on Thursday, possibly to 1.25 percent.
Governor Andrew Bailey had warned before May’s announcement that the BoE must follow a “very tight line” between cooling inflation and triggering a recession.
Consumer confidence fell last month and retail sales came in lower than expected, reflecting rising utility bills, food prices and fuel costs.
Here’s a quick, easy guide to how the latest interest rate change will affect you.
What are interest rates?
An interest rate is a measure that tells you how high the costs of borrowing money are, or how high the benefits of saving are.
When you borrow money, usually from a bank, the interest on that money is the amount you have to pay to borrow it.
It is a surcharge on top of the total amount of the loan and is shown as a percentage of the total.
Higher percentages mean that you have to pay more money to the lender for borrowing the money.
If you save money in a bank account, the interest on that money is the amount you accrue on top of your savings. Banks pay you a percentage of your total savings, usually at the end of the year.
How do interest rates affect inflation?
Low interest rates are used to discourage people from piling up their savings. High interest rates encourage saving because people get a better return for the money you put aside.
This in turn has consequences for the price of goods.
When interest rates are low, people can spend more and this can cause retailers to increase the price of goods.
When interest rates are high, demand may fall as people put more money into their piggy banks. In theory, this should lower the prices of goods and services.
However, rising prices are not a direct result of interest rate changes. Other things, including the money supply and underlying costs, affect prices and cause inflation.
Interest rates can only help control inflation.
How does the interest rate affect the mortgage rate?
Changes in the BoE’s base rate, the rate at which banks borrow from the bank, have a knock-on effect on the interest rates that the major banks then set to their mortgagees.
How does this affect me?
The changes in interest rates affect everyone who saves and everyone who borrows money from the bank, for example in a mortgage.
It will also have a broader effect on the economy. By raising key interest rates, the BoE hopes to dampen rising inflation and help with the cost of living crisis.
Despite this, inflation is forecast to continue rising for the foreseeable future – tipped to eventually top 10 percent.