The Bank of England is expected to raise UK interest rates for the 10th time in a row later, but analysts predict it is nearing the peak.
The benchmark rate is widely expected to go up from 3.5% to 4%, after the Monetary Policy Committee meeting.
The rate is already at its highest level for 14 years.
The impact of a rate rise would be felt by borrowers – through higher mortgage and loan costs – and in better returns for savers across the UK.
At its December meeting, the Bank rate was increased from 3% to 3.5% – the latest in a series of increases since December 2021.
Analysts believe the rate will peak at 4.5% in the summer.
How high could interest rates go?
More rate rises are likely to come, but there is a widespread belief that these may end by the middle of the year. The Bank will be keen not to dampen the economy, which is expected to enter recession.
The peak is lower than predictions had suggested when the government was in turmoil after its mini-budget was badly received.
The Bank’s monetary policy committee meets eight times a year to decide interest rate policy.
It is under pressure to put rates up because it has a target to keep inflation at 2%, but prices are currently rising at 10.5%, more than five times that level.
How do interest rates affect me?
Just under a third of households have a mortgage, according to the government’s English Housing Survey.
After a period of ultra-low rates, many homeowners are now facing the likelihood of much more expensive monthly repayments. The Bank of England says up to four million households face a higher monthly mortgage bill this year.
When interest rates rise, about 1.6 million people on tracker and variable rate deals usually see an immediate increase in their monthly payments.
An increase in the Bank rate from 3.5% to 4% would mean those on a typical tracker mortgage would pay about £49 more a month. Those on standard variable rate mortgages face a £31 jump.
This would come on top of increases following the previous recent rate rises. Compared with pre-December 2021, average tracker mortgage customers would be paying about £382 more a month, and variable mortgage holders about £240 more.
Three-quarters of mortgage customers hold a fixed-rate mortgage. Their monthly payments may not change immediately, but house buyers – or anyone seeking to remortgage, estimated to be 1.8 million people this year – will have to pay a lot more now than if they had taken out the same mortgage a year or more ago.
There has been considerable upheaval in this market since September’s mini-budget, even though most of the policies that were announced have now been ditched.
An average two-year fixed deal, which was 2.29% in November 2021, is now 5.44% – a difference of hundreds of pounds each month in repayments for a typical borrower.
You can see how your mortgage may be affected by rising rates with our calculator below.
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This calculator does not constitute financial advice. It is based on a standard mortgage repayment formula based on the mortgage size and length and a fixed interest rate. It should be used as a guide only and does not represent the suitability, eligibility or availability of mortgage offers for users. For exact figures, users will need to approach an official mortgage lender.
Interest rates fluctuate based on the Bank of England’s base rate and market conditions.
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Credit cards and loans
Bank of England interest rates also influence the amount charged on things such as credit cards, bank loans and car loans.
Even ahead of this decision, the average annual interest rate in December was 19.77% on bank overdrafts and 19.55% on credit cards.
Lenders could decide to put prices up further, in expectation of higher interest rates in the future.
Individual banks and building societies usually pass on interest rate rises to customers. The deals being offered now are better than anything seen for years.
Analysts say that people should shop around for a better savings rate, with many paid little or nothing in interest in many accounts.
But although this means savers get a higher return on their money, interest rates are not keeping up with rising prices.
This means the value of cash savings – its buying power – is falling in real terms.
Why does increasing interest rates help lower inflation?
The Bank has been putting rates up to combat rising prices – known as inflation.
Prices have been going up quickly worldwide, as Covid restrictions eased and consumers spent more.
Many firms have problems getting enough goods to sell. And with more buyers chasing too few goods, prices have increased.
There has also been a very sharp rise in oil and gas costs – a problem made worse by Russia’s invasion of Ukraine.
Raising interest rates helps to control inflation by making it more expensive to borrow money. This encourages people to borrow and spend less, and save more.
However, it is a tough balancing act as the Bank does not want to slow the economy too much. The Bank is predicting that the UK could be in recession – a period of economic decline – for two years which is longer than we have seen in comparable statistics.
Since the global financial crisis of 2008, UK interest rates have been at historically low levels. Rates were at 0.1% in 2021.
Are other countries raising their interest rates?
The UK is affected by prices rising across the globe. So there is a limit as to how effective UK interest rate rises will be.
However, other countries are taking a similar approach, and have also been raising interest rates.
The US central bank has announced big rate rises which have taken its key rate to levels not seen for nearly 15 years.
Other central banks around the world have also raised rates, as inflation continues to cause problems in a host of major economies.