It also indicated that the country is already in a recession, as it raised rates for the seventh time in a row.
Last month, the Bank increased rates by 0.5 per cent to 1.75 per cent. Two further big hikes are predicted by experts when the next interest rate decisions follow on 3 November and 15 December.
It is spiking in large part due to huge rises in wholesale energy prices, causing energy bills and prices at petrol pumps to rocket.
Rising interest rates can have a significant effect on people’s mortgages – here’s what you need to know.
How will rising interest rates affect my mortgage?
The interest rate hike is bad news for homeowners and those who are considering buying.
People on a variable rate deal – meaning the interest on your mortgage changes in line with the Bank of England’s interest rates – will see the amount they pay monthly go up.
Just over a fifth of all mortgage holders are on a variable rate deal, meaning about 1.9 million homeowners will be hit with a rate rise.
Borrowers who opted for a long-term fixed-rate deal in recent months will be protected for the length of the term. However, anyone coming to the end of their fixed-rate deal will see a considerable rise in their bills.
Laura Suter, head of personal finance at investment platform AJ Bell, said: “The biggest increases will be for those who come off their fixed-rate deal and find they are remortgaging at a much higher rate, costing vastly more each month.”
Alice Guy, a personal finance expert at interactive investor, added: “There is huge pain ahead for mortgage holders this winter, especially if they have a fixed-rate deal coming to an end.
“After the 0.5 per cent rates hike, households with a £200,000 fixed-rate mortgage face an eye-watering rise of £4,300 more each year compared with Sep 2020, and £358 more per month.
“Those on a tracker mortgage are facing a massive hike of £1,000 per year and £83 per month. With so many other rising costs, many families have a tough winter ahead. But those who have paid off their mortgage should see little impact from the interest rises.”
What are interest rates?
An interest rate is a percentage you are charged on an amount of money you borrow – or paid on the amount you save.
Your bank account will have an interest rate. Each month your bank will pay you that interest. For example, if you opened an account with £1,000 and the interest rate is 1 per cent, after a year your bank would pay you £10.
If you have taken out a loan, you will pay the interest to whoever loaned you the money, at a pre-agreed rate. The same goes for mortgages.
All interest rates are not made equal. The most important is the Bank Rate, which is set by the Bank of England.
The Bank of England explains: “We use Bank Rate in our dealings with other financial institutions, which influence lots of other interest rates in the economy. This includes the various lending and savings rates offered by high street banks and building societies.
“For example, in 2020 Bank Rate was cut to 0.1 per cent during the Covid-19 crisis. This reduced the rates at which high street banks could borrow money from the Bank of England, which in turn meant they could lend to their customers at lower rates. Banks lowered the interest rates on some loans, such as mortgages, but also offered lower interest rates on some savings accounts.”
What is inflation?
Inflation is a measure of how much the prices of goods and services increase over time. It is one of the most relevant economic measures for consumers as it affects their buying power and has an impact on everything from fuel prices to mortgages, as well as things like the price of train tickets and the cost of shopping.
Inflation is usually measured by comparing the cost of things today with a year ago. This average increase in prices is known as the inflation rate.
If the rate of inflation is 1 per cent, it means that prices are higher by 1 per cent on average. For example, a loaf of bread that cost you £1 a year ago will now cost you £1.01.
How is inflation measured?
In the UK, inflation is measured by the Office for National Statistics (ONS), which produces three main estimates of inflation: the CPI, the Consumer Price Index Including Housing Costs (CPIH) and the Retail Price Index (RPI).
To calculate the CPI – the most commonly used figure – the ONS looks at the prices of thousands of goods and services across the UK, and compares them year-on-year.
The items used in the basket to compile the various measures of price inflation are reviewed each year. For example, in 2019 smart speakers were added to the list of items monitored to ensure the UK’s measure of the cost of living reflects the public’s spending habits.
Why is inflation rising so much?
High oil and gas prices are one of main reasons for soaring inflation, as this has led to very high energy prices, and also significantly pushed up the price of fuel.
At the start of the Covid-19 pandemic, the price of oil crashed as the world shut down and demand dropped – in April 2020 oil recorded negative prices for the first time in history.
When global economies began to recover, the price shot up as demand rose sharply. But suppliers who had slashed production during the pandemic have struggled to scale back up to meet demand, pushing up prices.
The problem has been significantly exacerbated by Russia’s invasion of Ukraine. Russia is one of the world’s largest crude oil exporters, second only to Saudi Arabia.
Russian imports account for just 8 per cent of total UK oil demand, and the Government says it will phase out imports of Russian oil by the end of the year.
The EU is more reliant on Russian oil, and previously had been importing 27 per cent of its oil from Russia. EU leaders have agreed to ban most Russian oil imports by the end of the year, and the US has also announced a total ban.
This has caused demand for oil from other suppliers to rocket, resulting in higher prices, including for countries that did not originally source their oil from Russia.
The cost of used cars has also risen and is contributing to inflation, the Office for National Statistics (ONS) says.
Other factors include rising food prices, with the war in Ukraine squeezing grain production, as well as the costs of raw materials, household goods, furniture and restaurants going up.