Interest rates are expected to rise for the seventh time in a row when the announcement is made later on Thursday.
The Bank of England is expected to raise rates by half a percentage point, or perhaps more.
Last month’s half-percentage-point increase to 1.75% was the biggest increase in 27 years.
This move would be an attempt to slow down the pace of price increases. The last time interest rates were this high was during the 2008 financial crisis.
Why does raising interest rates help lower inflation?
Prices are rising rapidly around the world as Covid restrictions ease and consumers spend more.
Many businesses have trouble getting enough goods to sell. And with more buyers looking for fewer goods, prices have risen.
The cost of oil and gas has also risen sharply—a problem exacerbated by Russia’s invasion of Ukraine.
One way to try to control rising prices—or inflation—is to raise interest rates.
This increases the cost of borrowing and encourages people to borrow and spend less. It also encourages people to save more.
However, it is a tough balancing act, as the Bank does not want to slow down the economy too much.
Since the global financial crisis of 2008, UK interest rates have been at historically low levels. Last year, it was 0.1%.
How high could interest rates rise?
Analysts have predicted that UK interest rates will rise this month, but further increases are also expected later in the year and in 2023.
This can happen when people believe that price increases will continue: companies raise prices to keep making profits and workers demand wage increases.
If that happens, UK interest rates could hit 3.5%, the OBR said.
How do interest rates affect me?
Less than a third of households have a mortgage, according to the English Housing Survey, which is geographically limited but is one of the most comprehensive guides available.
Three-quarters of them have fixed mortgages, so they will not be affected immediately. The rest – about two million people – will see their monthly payments rise.
If rates rise to 2.25%, those with a regular mortgage tracker would have to pay around £49 more per month. Those with a standard variable rate mortgage would see an increase of £31.
This adds to the increases after the last rate hike.
Compared to before December 2021, tracker mortgage customers could already pay around £167 more per month, and variable mortgages around £132 more.
Even if you don’t have a mortgage, changes in interest rates can affect you.
Bank of England interest rates also affect the interest charged on credit cards, bank loans and car loans.
Bank decisions also affect the interest rates people earn on their savings.
Individual banks typically pass on interest rate increases, giving savers a higher return on their money.
However, for people withdrawing money, interest rates do not keep pace with price increases.
How does the Bank of England set interest rates?
Interest rates are decided by a group of nine economists, the Monetary Policy Committee.
They meet eight times a year – approximately every six weeks – to analyze the evolution of the economy.
Their decisions are always published at 12:00 on Thursday.
Are other countries raising interest rates?
The UK is affected by rising prices worldwide. So there is a limit to the effectiveness of UK interest rate rises.
However, other countries are taking a similar approach and raising interest rates as well
The US central bank has announced major rate hikes in recent months. Other central banks around the world have also raised rates.
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