UK interest rates rose 0.5 percent to 2.25 percent on Sept. 22 as part of a bid by the Bank of England (BoE) to dampen soaring inflation, bringing it to the highest level since the global financial crisis of 2001. 2008 came.
The institution’s Monetary Policy Committee (MPC) decision was widely anticipated but had to be postponed out of respect for the late Queen Elizabeth II and the ensuing period of national mourning.
The BoE said it now expects a 0.1 percent GDP decline in the current quarter, indicating the country is already in recession. .
In a statement announcing its decision, the BoE said: “In its August Monetary Policy Report, the MPC noted that the risks surrounding its projections of both external and domestic factors were exceptionally high given the very sharp rise in wholesale prices for gas since May and the resulting effects on real incomes for UK households and on the CPI [Consumer Price Index] inflation.
“Since August, wholesale gas prices have been very volatile and there have been major moves in financial markets, including a sharp rise in government bond yields worldwide. Sterling has depreciated significantly over the period.”
Earlier, the Office for National Statistics announced on September 14 that CPI inflation had fallen to 9.9 percent in August, from 10.1 percent in July.
Although experts had predicted that the figure would remain unchanged in August, falling fuel prices put downward pressure on inflation.
Here’s a quick and easy guide to how the 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 an expense on top of the total loan amount 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 lead retailers to increase the price of goods.
When rates are high, demand can 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 high street banks borrow from Threadneedle Street, have a knock-on effect on the interest rates that the former subsequently set their mortgage borrowers.
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.