How do interest rates affect inflation? A simple explanation Business News

Interest rates are expected to rise on Thursday as the Bank of England works to temper rising inflation.

The core inflation rate is already at its highest level in 13 years after the Bank raised it to 1%.

On May 6, the institution’s monetary policy committee decided to raise the base interest rate from 0.75% to 1%, the fourth consecutive time that the committee has voted in favor of raising interest rates. ‘interest.

The committee is now expected to raise the rate further on Thursday, potentially to 1.25%.

Governor Andrew Bailey had warned ahead of May’s announcement that the BoE had to walk a “very tight 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 the latest 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.

Cost of living: how to get help

The cost of living crisis has hit every corner of the UK, pushing families to the brink with rising food and fuel prices.

  • The Independent asked experts to explain small ways to stretch your money, including managing debt and getting free items.
  • If you need access to a food bank, search your local council’s website using, then use the local authority’s website to locate the nearest centre. The Trussell Trust, which runs many food banks, has a similar tool.
  • Citizens Advice provides free help to people in need. The organization can help you find grants or benefits, or advise you on rent, debt, and budgeting.
  • If you are experiencing feelings of distress and isolation, or if you are struggling to cope, The Samaritans offers support; you can talk to someone for free over the phone, confidentially, on 116 123 (UK and ROI), email or visit the Samaritans website to find contact details for the nearest branch.

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 BoE 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 set for their mortgage borrowers.

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 BoE hopes to temper the surge in inflation and contribute to the cost of living crisis.

Despite this, inflation is expected to continue to rise in the near future and should eventually exceed 10%.

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This notice was published: 2022-06-16 08:26:28

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