What do rising interest rates mean for you? Bank increases rates to 1.25%

Interest rates: High inflation will 'erode returns' says expert

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The Bank of England (BoE) announced it had increased interest rates from one percent to 1.25 percent on Thursday. Its decision marks the fifth consecutive time the bank has chosen to swell rates, as it attempts to tackle record levels of inflation. Experts have warned further rises could yet come before the end of 2022.

The latest push on interest rates matches the level that was last seen in 2009.

At that point the BoE was in the process of cutting rates to historic lows, as the global financial crisis took effect.

Since December 2021, the BoE has increased interest rates five times, from an initial starting point of 0.1 percent.

The news comes after it was announced the UK’s consumer price index measure of inflation had grown by 7.8 percent in the 12 months to April.

What do higher interest rates mean for you?

A rise in interest rates will be felt particularly by some Brits who have borrowed money, and are yet to repay the full amount.

Those who have mortgages tied to the Bank of England’s rates will also feel this squeeze, as monthly repayments are likely to be upped.

Ultimately, everyone will be affected by the development and soon begin to notice they have even less money to spend.

Why would the bank increase interest rates?

The idea of growing interest rates is usually linked to sharp levels of inflation. It now stands at nine percent, which is the highest the measure has been for 40 years.

So, when interest rates are swollen, borrowing becomes more expensive and people will have less money to spend.

Consumers would buy fewer things and prices will stop rising as fast.


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However, when inflation is triggered by external forces, such as the global squeeze on energy prices, then this might not be the answer.

Instead, the Government might choose to cut taxes for consumers on items that are rising quickly.

What is inflation?

Inflation is the rate at which prices rise. If the price of a loaf of bread is £1 and it rises by 5p, then bread inflation is five percent.

From month to month, you may not notice price rises. But right now, prices are rising so quickly that average pay is not keeping up.

When inflation is low, consumers have more spending power, and the exact opposite is true when inflation rates are high.

Inflation is primarily being pushed high because of the rising global price of energy.

From the start of April, the energy price cap grew by 54 percent, adding an average £700 to yearly energy bills for Britons.

Petrol prices have similarly soared in recent months, compounding issues for UK residents.

Last week the price of filling up a typical 55 litre family car broke the £100 barrier for the first time.

And now experts have warned costs could reach beyond £105 before the end of June.

The removal of most global Covid restrictions and the Russian invasion of Ukraine has helped to create the issues for motorists.

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