Why have interest rates gone up?

We’ve put up interest rates to help bring inflation back down. But it will take time to work.

This page was last updated on 5 May 2022

Why have interest rates gone up?

We’ve put up interest rates up to help bring inflation back down. It will take time to work.

The cost of living has risen sharply over the last year. The speed of that increase is called the rate of inflation

It’s our job to keep the UK’s rate of inflation low. We have a target of 2%. It’s higher than that at the moment. That’s mainly because of two things:

  • higher prices of goods coming from abroad
  • large increases in the cost of energy

Because changing interest rates takes time to work, we can’t do anything about the immediate impact of these things on inflation.

But we can use interest rates to help bring inflation back down towards our 2% target once their effects have begun to fade.

That’s why we’ve raised the UK’s most important interest rate (Bank Rate) over the last few months. It will take time to work. It’s likely that inflation will keep rising this year and start to come down next year. We expect it to be close to our 2% in around two years.

How much have interest rates gone up?

Interest rates have gone up in the UK. We began by raising the Bank of England’s own interest rate (Bank Rate) from 0.1% to 0.25% in December 2021. Since then, we’ve increased it three more times in 2022:

  • to 0.5% in February
  • to 0.75% in March
  • to 1% in May 

How high will interest rates go? 

That all depends on what happens in the economy. And how that might affect the rate of inflation over the next few years.

So we can’t say now exactly how high they will go. But we know they are not likely to reach the very high levels that 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 go 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 2.5%, the monthly repayment will be £583.

But if the interest rate is 0.25% higher – the amount we raised Bank Rate in May 2022 – the monthly repayment rises by £17 to £600.

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.

How does an interest rate rise help bring inflation down?

Higher interest rates makes borrowing more expensive. And it encourages saving. So they reduce how much people spend overall. This helps to push inflation down. 

We can change the UK’s single most important interest rate (Bank Rate). When it goes up (or down), it affects all the other interest rates in the UK. 

But higher interest rates don’t work straight away. They take time to take full effect. So when we use them, we always look at what we think will happen in the economy over the next few years, not just what’s going on now.

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

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