Everything you need to know about interest rates as the UK economy faces ‘tough times’

Today’s rate hike is expected to increase average repayments by around £21 a month – £252 a year – for a borrower with a £150,000 mortgage using his lender’s standard variable rate

Millions of borrowers were given a “hammer blow” today after the Bank of England hiked interest rates to a 13-year high.

The bank’s monetary policy voted to raise its key interest rate to 1.25% from 1% – marking the fifth straight monthly increase – to dampen rising inflation.

While three-quarters of mortgage borrowers have fixed-rate deals, nearly two million homeowners will be impacted because they have adjustable-rate and tracker deals.

Today’s increase is expected to increase average repayments by around £21 a month – £252 a year – for a borrower with a £150,000 mortgage who has his lender’s standard variable rate.

Since interest rates began to rise late last year, their payments have risen by £96 a month, broker L&C Mortgages calculates.

The rate hikes will also affect the estimated 1.3 million fixed-rate mortgage borrowers whose cheap deals will expire sometime this year and need a replacement.

Andrew Hagger, personal finance expert at Moneycomms.co.uk, said: “The recent increase in mortgage payments will be a hammer blow to households across the country facing a tsunami of rising costs for essential goods and services.”

Pat McFadden, Labor Party shadow secretary at the Treasury, said: “This underscores the seriousness of the situation in which the economy finds itself.

“Many families will be concerned about the impact this will have on their household bills.”

Despite the recent rate hike, the Bank of England is now warning that inflation could easily climb above 11% in October if energy prices are allowed to pick up again.

Communities Secretary Michael Gove admitted today the country was facing “tough times”.

Speaking at a summit in London, he said that while the government has a duty to help the “poorest,” the squeeze on public finances means it is unable to provide the level of support it wants.

He continued: “Britain and the global economy are bound to face tough times.”

Why is the Bank of England raising interest rates?

To try to cool down inflation. One of the Bank’s key tasks is to anchor inflation at 2%, but inflation is already at a 40-year high of 9% and is expected to rise even higher.

Rising interest rates drive up the cost of borrowing, which should discourage certain spending and lower inflation. It is also designed to help households and businesses plan ahead.

Some pundits think the bank should have raised rates sooner, while others warn it could plunge the economy into recession now.

What does this mean for mortgage borrowers?

The vast majority of borrowers have fixed income businesses and are therefore shielded for now.

However, around two million mortgage borrowers rely on variable rate transactions.

Those with fixed rate home loans will be hit when their cheap deal ends and they try to get a new one.

What about other loans?

Interest rates on personal loans are already at their highest level in more than five years and could rise further.

Overdraft rates could also rise.

While credit card rates could also rise, there’s a flood of zero percent transfer and purchase rates for those who qualify.

What about savers?

Savers are the forgotten victims of more than a decade of interest-rate rock bottoms. Now the Bank of England is raising interest rates, which should theoretically benefit savers. BUT most major lenders are so awash with funds that they don’t have to offer reasonable savings rates to raise more money. So expect some increase in savings rates, but don’t rush it.

Will interest rates continue to rise?

Most experts believe it will, but it’s hard to say when and at what rate.

Three members of the nine-member monetary policy committee today voted for an even larger 0.5% hike.

However, the Bank of England will also closely monitor other economic measures, including wage increases.