THE Bank of England has hiked interest rates to 0.75% – and it could add hundreds of pounds to household bills.
The decision is the third since December to increase the base rate as the country grapples with rising inflation.
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Inflation hit 5.5% in January – the highest level seen since March 1992 – and is predicted to rise further.
It means that bills across the board are rising, from food to fuel to mortgages in a cost of living crisis that is hitting millions of Brits.
Increasing interest rates is like a lever for slowing down inflation – but it means the cost of borrowing increases.
This means that consumers and businesses have less money to spend, and in theory, as demand for goods and services fall, so should prices.
The base rate was lifted from the historic low on 0.1% to 0.25% just before Christmas and a further hike to 0.5% in February.
The hikes are an effort to tackle rising inflation which the Bank of England has a target of 2% for steady economic growth.
But the bank warned that inflation could soar further.
Last month the central bank warned that it could hit just over 7% by April, but now it has said it could hit 8%.
Mortgage repayments
Many homeowners should expect to pay more on their mortgage repayments if interest rates go up.
That’s if you are on a variable rate, AJ Bell head of personal finance Laura Suter said – these homeowners will see their interest rate go up.
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That’s because a variable rate tracker mortgage is linked to the Bank of England base rate – which means you are likely to see an immediate impact on your mortgage repayments if there is an interest rate rise.
The latest data from UK Finance shows that 26% of residential mortgages are on variable rates.
This means the changes will affect around 2.2 million borrowers.
Should interest rates go up today, someone with a £250,000 variable rate mortgage will pay an extra £384 a year, Ms Suter said.
This could go up even more should interest rates go up later this year as well.
“The current market expectations are that the base rate will rise four more times this year, taking it to 1.75% before the end of 2022,” she said.
“If this is the case, homeowners with £250,000 of borrowing will have to pay an extra £1,956 a year, or £163 a month.”
To beat the future hikes, you might want to consider fixing your mortgage to lock in current rates and avoid a rise.
Loans and credit card bills
You might find that the interest rate on your credit card or overdraft will rise along with a Bank of Interest rate hike.
Many big banks – like Lloyds Bank, MBNA, Halifax and Barclaycard – link their credit card rates directly to the Bank of England base rate.
That means their credit card rates will hike automatically in line with any changes to interest rates that could happen today – but you’ll be given notice before this happens.
If you had a balance of £2,000 on your credit card, a rate rise of 0.25 percentage points rate rise would add an extra £5 onto your bill per year.
If you had a balance of £8,000, this would increase by an extra £20 a year.
Hargreaves Lansdown personal finance analyst said banks tend to rise rates when any Bank of England rate hikes happen.
“In February, we had a flood of new cards at much higher rates, so that the average credit card rate jumped to 26.3% in the first three months of this year,” she said.
If you are looking to take out a personal loan AFTER an interest rate rise, you may find the cost of new borrowing has increased.
Tax bills
Rising Bank of England rates could have a knock-on effect on how much tax you are paying.
That’s because the government will have to pay more for its borrowing.
This cost could be passed down to the tax payer – such as a rise in National Insurance.
National Insurance is already going up by 1.25 percentage points in April, adding hundreds to workers’ tax bills.
Any further increase would be slammed which means it is more unlikely the government will chose to do this – but it is an option.
It is not known exactly which – and if – taxes will go up.
But the Treasury has previously considered measures such as cutting pensions tax relief for high earners, increasing capital gains tax and introducing a digital sales tax for online retailers.
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