A year of financial hardship started in earnest last month when energy chiefs at Ofgem greenlit a price cap adjustment that added £630 to people’s bills. Over the next few months, Britons will also have to reckon with growing inflation, the Government’s National Insurance hike and more expensive fuel at the pump. Some may borrow to alleviate some of the pressure on their household finances, but interest rates will ultimately decide whether this is wise.
Will interest rates go up in 2022?
Interest rates express the cost of borrowing and benefits of saving in percentage form. For example, an interest rate of three percent on a loan of £10,000 would require borrowers to pay back approximately £300 per month.
And savings accounts with rates like this would mean savers gain an additional three percent on their savings account contents per year.
Interest usually varies by provider, but one figure set by the Bank of England determines national rates.
Executives with the organisation set the Bank Rate or “Bank of England Base Rate”, which dictates the rates at which firms borrow.
The bank’s Monetary Policy Committee (MPC) holds meetings every few months and decides how to adjust the rate.
The last meeting, held on March 16, saw members vote to increase the rate from 0.5 percent to 0.75 percent by eight to one.
Their report cited several factors for the decision, including the CPI inflation rate, energy and commodity prices, and UK GDP.
Members added that the “tightness of the labour market, continuing signs of robust domestic cost and price pressures, and the risk that those pressures will persist” warranted the 0.25 percent increase.
The MPC will have to consider these aggravating factors again ahead of the upcoming meeting on May 5.
Analysts expect the Bank of England will raise interest rates again this week for its fourth consecutive time.
Many believe the MPC will opt for another 0.25 percent raise, bringing interest rates to one percent.
Citi Bank economist Benjamin Nabarro told the Financial Times that they would act on near-term “markedly high inflation” and deteriorating economic momentum.
Once rates reach one percent, bank officials may enact their quantitative easing programme and start selling off bonds.
Ultimately, higher interest rates from the Bank of England will put another crunch on consumers.
During the pandemic, when financial hardship was widespread for many, the bank set rates at 0.1 percent to make it cheaper for firms to borrow.
Less expensive borrowing meant they had less cause to pass costs on to customers.
The risk of this grows markedly if the Bank of England makes it more costly for them to borrow with higher interest rates.