Why has the Bank of England hiked interest rates and what does it mean?

Why has the Bank of England hiked interest rates and what does it mean?

The Bank of England has raised interest rates for the tenth time in a row, further increasing the pressure on households.

The decision was made to keep inflation under control.

But why is this helping inflation, and what might come later?

– Why did the bank raise interest rates?

The Bank of England’s job is to keep inflation under control. At the moment, inflation is not under control, reaching 10.5% for the year to December.

The Monetary Policy Committee’s (MPC) primary tool in fighting inflation is its power to set the base interest rate.

If it raises interest rates it is generally seen as putting downward pressure on inflation, if it lowers rates inflation should often rise.

– Why do interest rates affect inflation?

In simple terms skipping a few steps, the base rate is used by regular banks to help them decide what rate to charge borrowers and also what to pay savers.

This means that people who take out a mortgage have to pay more interest on their loan.

This means they end up with less money in their pockets at the end of the month, reducing their spending on businesses and businesses.

This reduces demand in the economy, which puts less pressure on the supply of goods and services.

(PA graphic)

This means that companies may offer their goods and services at a lower price, or at least not increase prices as quickly.

Inflation measures the prices of what households buy. So when prices aren’t rising fast, inflation is low.

– Will my mortgage go up soon?

The answer to that depends on what type of mortgage you have. If you have a tracker mortgage — the kind that tracks directly the base rate — you can expect your interest payments to increase pretty soon.

If you have a fixed-rate mortgage, you won’t pay more interest until you need to refinance when your current deal expires.

– Is there anything else?

Perhaps. The bank signaled on Thursday that the UK could be close to, and may have already reached, peak interest rates.

Policymakers said they could raise rates again, but only if they see evidence of lingering inflationary pressures.

Inflation has already started falling from the 40-year highs it hit last year, and the bank said it expects the measure to fall quickly this year.

Gov. Andrew Bailey said the committee deliberately softened the language it used this time, as it no longer promises to act “forcefully” to bring down inflation.

But he added that it was “too early to declare victory over inflation”.

– Have all decision-makers agreed?

no There is a split in the committee. But instead of wanting to raise interest rates further, the dissidents – there were two of them – wanted to leave them unchanged.

They argued that the economy was weak as people’s real incomes fell.

They also said the impact of the recent rate hikes has not yet come through – there tends to be a lag.

They argued that by raising interest rates further, the bank would bring inflation well below its target rate, requiring some of those decisions to be reversed later.

Leave a Reply

Your email address will not be published. Required fields are marked *