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How do interest rates affect me? How do interest rates affect me and when will they come down?
(21 days later)
The Bank of England held interest rates at 5.25% for the fifth time in a row at its last meeting, but cuts are expected later in the year. The Bank of England held interest rates at 5.25% in May, but cuts are expected later in the year.
Interest rates move up and down in order to control UK inflation, which has come down sharply in recent months, easing cost-of-living pressures. Interest rates affect mortgage, credit card and savings rates for millions of people across the UK.
However, the UK economy has been stagnating amid increased borrowing costs and other pressures.
Interest rates set by the Bank of England affect mortgage, credit card and savings rates for millions of people across the UK.
What are interest rates and why do they change?What are interest rates and why do they change?
The Bank of England's base rate, currently 5.25%, is what it charges other lenders to borrow money. An interest rate tells you how much it costs to borrow money, or the reward for saving it.
This has a knock-on effect on what other banks charge their customers for loans such as mortgages, as well as the interest they pay on savings. The Bank of England's base rate is what it charges other lenders to borrow money.
The Bank's Monetary Policy Committee meets eight times a year to decide what the base rate should be. This influences what other banks charge their customers for loans such as mortgages, and the interest they pay on savings.
It has a target to keep UK inflation at 2%. Inflation is the rate at which prices are rising across the economy as a whole. The Bank of England moves rates up and down in order to control UK inflation - the increase in the price of something over time.
When inflation is going up, the Bank may decide to raise rates to encourage people to spend less. The idea is that this helps to bring inflation down by dampening demand. When inflation is high, the Bank - which has a target to keep inflation at 2%- may decide to raise rates.
The idea is to encourage people to spend less, to help bring inflation down by reducing demand.
Once this starts to happen, the Bank may hold rates, or cut them.Once this starts to happen, the Bank may hold rates, or cut them.
When will UK interest rates go down?
The Bank rate is currently at its highest level for 16 years.
However, it was higher than this for much of the 1980s and 1990s, and was 17% in November 1979.
There have been questions about why interest rates have not been cut, with inflation dropping sharply.
Inflation was at 3.2% in March - down from a peak of 11.1% in October 2022. Further falls are expected.
Following May's decision to keep interest rates at 5.25%, the Bank's governor Andrew Bailey said he was "optimistic that things are moving in the right direction".
But he said the Bank needed to "see more evidence" that price rises had slowed further before cutting interest rates.
It left open the possibility of an interest rate cut in June, after two sets of new figures for inflation and wages are published. However, a cut later in the summer is considered more likely.
The Bank has to balance the need to slow price rises against the risk of damaging the economy - which has shown little sign of growth.
Bank optimistic 'things moving in right direction'
How do interest rates affect me?How do interest rates affect me?
MortgagesMortgages
Just under a third of households have a mortgage, according to the government's English Housing Survey.Just under a third of households have a mortgage, according to the government's English Housing Survey.
When interest rates rise or fall, more than 1.4 million people on tracker and standard variable rate (SVR) deals usually see an immediate change in their monthly payments. When interest rates rise or fall, more than 1.2 million people on tracker and standard variable rate (SVR) deals usually see an immediate change in their payments.
About three-quarters of mortgage customers have fixed-rate deals. Their monthly payments aren't immediately affected when the Bank changes rates, but future deals are. More than eight in 10 mortgage customers have fixed-rate deals. While their monthly payments aren't immediately affected, any future deals are.
Mortgage rates are much higher than they have been for much of the past decade.Mortgage rates are much higher than they have been for much of the past decade.
This means homebuyers and those remortgaging will have to pay a lot more than if they had taken out the same mortgage a few years ago. This means homebuyers and those remortgaging have to pay a lot more than if they had borrowed the same amount a few years ago.
About 1.6 million deals will expire in 2024, according to banking trade body UK Finance.About 1.6 million deals will expire in 2024, according to banking trade body UK Finance.
You can see how your mortgage may be affected by interest rate changes by using our calculator:You can see how your mortgage may be affected by interest rate changes by using our calculator:
If you can't see the calculator, click here.If you can't see the calculator, click here.
What happens if I can't afford to pay my mortgage? Why mortgage rates are going up not down
Five ways to save money on your mortgageFive ways to save money on your mortgage
Credit cards and loansCredit cards and loans
Bank of England interest rates also influence the amount charged on credit cards, bank loans and car loans.Bank of England interest rates also influence the amount charged on credit cards, bank loans and car loans.
Lenders could decide to put their rates up, if they expect higher interest rates from the Bank of England, but if rates fall, interest payments may get cheaper. Lenders could decide to put their rates up if they expect higher interest rates from the Bank of England. However, if rates fall, interest payments may get cheaper.
Low interest rates are good for borrowers, but bad for saversLow interest rates are good for borrowers, but bad for savers
SavingsSavings
The Bank of England interest rate also affects how much savers can earn on their money.The Bank of England interest rate also affects how much savers can earn on their money.
Individual banks and building societies have been under pressure to pass on higher interest rates to customers.Individual banks and building societies have been under pressure to pass on higher interest rates to customers.
There are some good deals on the market, so analysts say that customers should shop around, as money may be in accounts paying little or no interest. There are some good deals on the market and experts say customers should shop around, as money may be in accounts paying little or no interest.
The UK's financial watchdog warned banks will face "robust action" if they offer unjustifiably low savings rates to their customers. The UK's financial watchdog warned banks will face "robust action" if they offer unjustifiably low savings rates to customers.
When will UK interest rates go down?
The Bank rate is currently at its highest level for 16 years.
However, the rate was higher than this for much of the 1980s and 1990s, and was running at 17% in November 1979.
There have been plenty of questions about why interest rates have not yet been cut, with the rate of inflation dropping sharply.
Inflation was running at 3.2% in March. While that was down from a peak of 11.1% in October 2022, it is still above the Bank's 2% target. However, further falls are expected in the rate in the coming months.
Governor Andrew Bailey has said that he had seen "further encouraging signs" that inflation was coming down. But he emphasised that the Bank had to be sure that it would fall back to its target and stay there.
"We're not yet at the point where we can cut interest rates, but things are moving in the right direction," Mr Bailey added.
The Bank has to balance the need to slow price rises against the risk of damaging the economy - which has shown little sign of growth - by keeping rates high.
When will the Bank of England start to cut interest rates?
Are other countries raising their interest rates?Are other countries raising their interest rates?
Interest rates have also been increasing across the world. Interest rates have been increasing across the world over the past few years.
However, in recent months, other central banks - including the US Federal Reserve and the European Central Bank - have also paused their rate rises. However, in recent months, other central banks - including the US Federal Reserve and the European Central Bank - have also paused their rate rises, with the next moves expected to be downwards.
The UK has had one of the highest interest rates in the G7 - the group representing the world's seven largest so-called "advanced" economies.The UK has had one of the highest interest rates in the G7 - the group representing the world's seven largest so-called "advanced" economies.
How will the UK economy compare to other countries in 2024?
Related TopicsRelated Topics
SavingsSavings
MoneyMoney
Personal financePersonal finance
Cost of LivingCost of Living
UK economyUK economy
Bank of EnglandBank of England
MortgagesMortgages