Today the Bank of England (BoE) raised the bank rate from 2.25% to 3%. It’s the eighth consecutive hike in interest rates and the biggest increase since 1989. The decision takes rates to a 33-year high and comes as the BoE tries to curb inflation.

Are you wondering what the ‘bank rate’ increase means for you? You’ve come to the right place. Keep scrolling to find out everything you need to know about the latest interest rise.

What is the 'Bank Rate’ and how is it set?

'Bank Rate' is the single most important interest rate in the UK. The Bank of England set this interest rate. It’s also referred to as the ‘Bank of England base rate’ or even just ‘the interest rate’.

The bank rate influences other interest rates in the UK's economy. E.g. the lending and savings rates offered by high-street banks and building societies.

The Bank of England’s Monetary Policy Committee (MPC) is responsible for making decisions about bank rate. The MPC is made up of nine members – the Governor, the three Deputy Governors for Monetary Policy, Financial Stability and Markets and Banking, the Chief Economist and four external members appointed directly by the Chancellor.

Typically, the Bank announces the MPC’s interest-rate decision every six weeks after reviewing how the economy is doing and whether a change in interest rates is needed. The next bank rate (aka the base rate or interest rate) announcement is due on 14th December 2022.

Why are interest rates going up?

The Bank of England put up interest rates to try and bring the rate of inflation back down. Their job is to make sure inflation is low and stable. Over the last 12 months the BoE bank rate has increased from 0.1% last December, to 3%, which was announced today.

Last month, food inflation soared to a record 11.6%. Overall, shop prices are now 6.6% higher than they were this time last year.

Helen Dickinson OBE, Chief Executive of the British Retail Consortium, said:

"It has been a difficult month for consumers who not only faced an increase in their energy bills, but also a more expensive shopping basket. Prices were pushed up because of the significant input cost pressures faced by retailers due to rising commodity and energy prices and a tight labour market. Even the price of basic items went up, with the price of the humble cuppa rising, as tea bags, milk and sugar all saw significant rises. While some supply chain costs are beginning to fall, this is more than offset by the cost of energy, meaning a difficult time ahead for retailers and households alike.

How does the interest rate rise affect you?

If you’re saving money

It’s good news for savers! If you have a savings account, the interest rate tells you how much additional money will be paid into your account, as a percentage of your savings. The higher the percentage, the more money paid into your account.

In theory, the interest rate rise should lead to higher interest on savings accounts. However, not all bank rates are responding to the bank rate rise and are offering low rates on savings accounts, so now that interest rates are rising, you should shop around to make sure you’re getting the most out of your money.

Our Smart Money People community has been sharing their honest experiences, so you can shop with confidence. Read savings reviews from real people, so you can start making better financial decisions when choosing the best financial product for you.

If you’re borrowing money

If you have taken out a loan, the interest rate is the amount you are charged for the borrowing money, shown as a percentage of the total amount of the loan. The higher the percentage, the more you have to pay back.

You usually agree to a fixed rate of interest when you take out a personal loan, such as finance to buy a car, so it usually won’t be affected by the bank rate increase.

If you have a mortgage

Economic volatility and uncertainty in the UK has led to a sharp rise in mortgage interest rates and many major lenders – including HSBC and Santander suspending mortgage deals last month amid fears of further interest rate hikes.

If you have a mortgage, typically, rates go up and your monthly payments will increase when the bank rate goes up.* However, if you have a fixed-rate mortgage, nothing will change during the fixed period. If you’re not sure what mortgage deal you have, check your paperwork or with your mortgage provider to find out.

Some experts think that the latest rate will not result in the fixed-rate mortgage costs increasing due to deals already being “overpriced” after the market was hit by financial turmoil during former Prime Minister Liz Truss's time at 10 Downing Street.

*Mortgage rates are based on a number of different factors, not just the bank rate.

What can we expect for the UK economy moving forward?

  • The BoE’s goal is to get inflation back down to 2%.
  • The BoE expect inflation to fall sharply from the middle of next year.
  • The price of energy is not expected to rise so rapidly. The UK Government has introduced a scheme that caps energy bills for households and businesses for six months.
  • The BoE don’t expect the price of imported goods to rise so fast as some of the production difficulties that businesses have faced are starting to ease.
  • The slowdown in demand for goods and services should force prices to go down.

Don’t suffer in silence

The rising cost of living is continuing to stretch budgets across the UK. If your money worries are having an impact on your mental health, don’t suffer in silence. There are plenty of free resources available that are ready to help you get back on track. Visit our blog which lists what support is available if you need it.

The contents of this blog don’t constitute advice. If you are struggling with your mental health and have money worries, please visit some of the resources listed here. For 24-hour support, you can also call Samaritans on 116 123.