Interest Rates: How High Could They Go?
Interest rates have been raised from 0.5% to 0.75% – their highest level since March 2020.
The Bank of England announced its decision a day after US interest rates were raised for the for the first time since 2018.
Why are interest rates going up?
Adjusting interest rates is one of the many ways the Bank tries to manage the UK economy.
Sine the global financial crisis of 2008, UK interest rates have been at historically low levels. In March 2020 the rate was just 0.1%.
The aim was to encourage firms and individuals to borrow or spend money – to get the economy moving.
But there is a balancing act to perform. The Bank wants to encourage spending and growth, but also to make sure that this does not lead to rising prices.
Raising interest rates – to encourage people and firms to borrow and spend less, or to save money – is one of the tools it uses to limit inflation.
Prices are now rising quickly in the UK and around the world, as Covid restrictions ease and consumers spend more.
But many firms are having problems getting enough goods to sell. And with more buyers chasing too few goods, prices have risen.
There has also been a very sharp rise in oil and gas costs – a problem made worse by Russia’s invasion of Ukraine.
Many economists expect inflation to reach 7% this year, which would be its highest level since March 1992.
How high could interest rates go?
Few had been expecting UK interest rates to top 1.25% this year.
But the Office for Budgetary Responsibility (OBR) – the government’s independent economic advisor – looked at the impact of higher and more persistent inflation.
This can happen if people think price rises will continue. Businesses could raise prices to keep making a profit and workers could demand wage increases to maintain living standards.
The OBR has suggested that if this occurs interest rates could reach 3.5%.
How do interest rates affect me?
If interest rates rise, it can make borrowing more expensive – especially for homeowners with mortgages.
Bank of England interest rates also influences the interest charged on other forms of credit, such as credit cards, bank loans and car loans.
So even if you don’t have a mortgage, changes in interest rates could still affect you.
Bank of England decisions also affect the interest rates people earn on their savings.
Individual banks usually pass on any interest rate rises to their savers – giving them a higher return on their money.
How does the Bank of England set interest rates?
Interest rates are decided by a team of nine economists, the Monetary Policy Committee.
They meet eight times a year – roughly once every six weeks – to look at how the economy is performing.
Their decisions are always published at 12:00 on a Thursday.
By Ben King
Business reporter, BBC News, 17th March 2022