Why have interest rates gone up?

We’ve put up interest rates to stop prices rising so fast and help bring the rate inflation back down. 

This page was last updated on 04 August 2022

Why have interest rates gone up?

Parliament tasks us with keeping the rate of inflation at 2%.  Putting up interest rates is main thing we, as the UK’s central bank, can do to stop prices rising so fast and bring down the rate of inflation

We set the UK’s key interest rate, Bank Rate. It’s more widely known as ‘the base rate’ or just ‘the interest rate’. It influences all the UK’s other rates including any you might have for a loan, mortgage or savings account.

We’ve raised Bank Rate gradually since December. Most recently, we put it up on Thursday 4 August to 1.75%.

How Bank Rate has changed over time

Why is inflation so high?

Higher energy prices are one of the main reasons why inflation is so high. Russia’s invasion of Ukraine has led to more large increases in the price of gas. Since May, the price of gas has doubled. We think those price rises will push inflation even higher over the next few months, to around 13%.

Higher prices for the goods we buy from abroad have also played a big role. 

During the Covid pandemic people started to buy more goods. But the people selling these have had problems getting enough of them to sell to customers. That led to higher prices – particularly for goods imported from abroad. 

There is also pressure on prices from developments in the UK.

Businesses are charging more for their products because of the higher costs they face. There are more job vacancies than there are people to fill them, as fewer people are seeking work following the pandemic. That means that employers are having to offer higher wages to attract job applicants. And prices for many services have gone up.

How high will interest rates go? 

We will take the actions necessary to bring inflation down to 2%.

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 3.5%, the monthly repayment will be £651.

But if the interest rate is 0.5% higher – the amount we raised Interest rates in August 2022 – the monthly repayment rises by £35 to £686.

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.

Why isn’t my mortgage, loan or saving interest rate going up the same as Bank Rate?

If Bank Rate changes, then normally banks change their interest rates on saving and borrowing. But Bank Rate isn’t the only thing that affects interest rates on saving and borrowing.

Interest rates can change for other reasons and may not change by the same amount as the change in Bank Rate. To cover their costs, banks need to pay less on saving than they make on lending. But they can’t pay less than 0% on savings or people might not deposit any money with them. 

This means that when Bank Rate comes close to 0%, how far banks pass it on to lower saving and borrowing rates reduces. And as Bank Rate starts to rise away from close to 0%, that’s likely to lead to less of a rise in some saving and borrowing rates.

How do higher interest rates help to bring down inflation?

Higher interest rates make it more expensive for people to borrow money and they also encourage people to save. The result is that, overall, people will tend to spend less.

If people spend less on goods and services overall, then the price of those things tend to rise more slowly. Slower price rises mean a lower rate of inflation.

The action we take to keep inflation low and stable is called monetary policy

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