Interest rate: what is it and how does it affect inflation? Business News

Interest rates were raised to their highest level in 13 years on Thursday as the Bank of England tries to temper rising inflation.

The Bank’s Monetary Policy Committee decided to raise the base interest rate from 0.75% to 1%.

This is the fourth consecutive time that the commission has voted in favor of raising interest rates.

Governor Andrew Bailey had warned ahead of the announcement that the Bank must toe a “very narrow line” between cooling inflation and triggering a recession.

Consumer confidence fell last month and retail sales were below expectations, due to the impact of soaring energy bills, food prices and fuel costs.

Here’s a quick and easy guide to how Thursday’s interest rate change will affect you:

What are the interest rates?

An interest rate is a measure that tells you the cost of borrowing or the benefits of saving.

If you borrow money, usually from a bank, the interest rate on that money is the amount you will be charged to borrow it.

This is a charge that is added to the total loan amount and will be shown as a percentage of the total amount.

Higher percentages mean paying more money to the lender to borrow money.

If you save money in a bank account, the interest rate on that money is the amount you will accumulate on top of your savings. Banks will pay you a percentage of your total savings, usually at the end of the year.

How do interest rates affect inflation?

Low interest rates are used to discourage people from hoarding their money in savings. High interest rates encourage saving because people get a better return for the money you put aside.

This in turn has an effect on the price of goods.

When interest rates are low, people can spend more and this can cause retailers to raise the price of goods.

When interest rates are high, demand can drop as people put more money into their savings pots. This, in theory, should lower the prices of goods and services.

However, the rise in prices is not the direct result of changes in interest rates. Other factors, including money supply and underlying costs, affect prices and cause inflation.

Interest rates can only help manage inflation.

How do interest rates affect mortgage rates?

Changes to the Bank of England’s base rate, which is the interest rate at which banks borrow from the Bank, have a knock-on effect on the interest rates that the big banks then charge their borrowers mortgages.

How does this affect me?

Interest rate changes will affect anyone with savings and anyone who borrows money from banks, for example for a mortgage.

It will also have a wider effect on the economy. By raising the base interest rate, the Bank of England hopes to temper soaring inflation and contribute to the cost of living crisis.

Despite this, inflation is expected to continue to rise in the near future – peaking at 10%.

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This notice was published: 2022-05-05 13:08:16

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