The Bank of England has raised interest rates for the twelfth time in a row.
But why have they increased and what does it mean?
FactCheck takes a look.
How much have interest rates risen by?
The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 7-2 to increase the base rate of interest by 0.25 percentage points to 4.5 per cent.
The base rate is the amount the Bank of England charges other banks when they borrow money. It influences the interest rates that many lenders charge for mortgages, loans and other types of credit they offer people.
The base rate is now at its highest level since the peak of the global financial crisis in October 2008, which saw several major banks collapse.
The Bank of England is independent of government, which means the decision on interest rates is not taken by prime minister Rishi Sunak, or the chancellor, Jeremy Hunt.
Why have they been increased?
The Bank of England has a target to keep inflation at 2 per cent – with 1 per cent wriggle room either side. The current rate of inflation is well above this, at 10.1 per cent.
The Bank said food prices are currently a driving force behind the UK’s inflation rate.
The central bank has therefore increased the interest rate in the hope of reducing consumer spending in order to tackle this high inflation rate.
Higher interest rates make it more expensive for people to borrow money and encourage people to save, which means people tend to spend less.
If people spend less on goods and services, the prices of those things tend to rise more slowly, and slower price rises mean a lower rate of inflation.
Have interest rates reached a peak?
We don’t know yet whether interest rates have reached a peak.
When interest rates rose to 4 per cent in February, at the time the Bank suggested that the-then tenth consecutive hike in interest rates could be the last for the time being. It said that it would only raise rates further “if there were to be evidence of more persistent [inflationary] pressures” than already forecast.
Although inflation has dropped marginally from 10.5 per cent in February to its current 10.1 per cent, it still remains high, hence interest rates rising to 4.25 per cent in March and now 4.5 per cent.
But the Bank has now said that inflation is “expected to fall sharply from April”, predicting it to drop to 5.1 per cent in the fourth quarter of the year – instead of its previous forecast of 3.9 per cent.
If inflation does drop, then the Bank is likely to lower the base rate to reflect this.
What does this mean for mortgages?
The rise in interest rates is likely to put further pressure on many households currently struggling with the cost of living.
It will also mean higher mortgage payments for some homeowners and people looking for loans will face higher borrowing costs.
Brian Murphy, head of lending at independent mortgage intermediary, the Mortgage Advice Bureau, told FactCheck that the increase in interest rate rises “will continue to pile more pressure on people’s finances, especially those who’ve recently moved to a tracker or variable rate deal”.
Unlike fixed-rate mortgages, tracker or variable mortgages can change, which means the amount you pay each month could go up if interest rates rise.
He said: “For people across the UK, it will seem they’re being squeezed from all angles, with inflation continuing to push prices up at the checkouts, and interest rates likewise increasing the cost of mortgages.”
But it’s better news for those who have a pre-2022 mortgage rate coming to an end soon, as Mr Murphy says the mortgage market is “gradually returning to more competitive deals”, and “we expect these to continue to decrease as the year progresses”.