The Bank of England (BoE) has announced its decision to raise the base interest rate from 4.25% to 4.5%, marking the highest level since October 2008, before the credit crunch sent rates plummeting. This is also the bank's 12th consecutive bump in interest rates.
Approximately 2.2 million individuals with variable-rate mortgages will face immediate increases in their bills as a result of this decision, while prospective house buyers and those looking to remortgage their properties will have to pay significantly more than they would have just a year ago.
In addition, the European Central Bank (ECB) has opted for a smaller increase of only .25 percentage points but has left room for further adjustments if necessary.
As inflation levels remain at an alarming high of 10.1%, there is considerable uncertainty surrounding whether or not interest rates will continue rising; however, some economists predict that they may begin stabilising soon.
Bank of England Governor Andrew Bailey addressed these concerns during a press conference following the UK central bank's latest monetary policy decision: "With inflation remaining five times higher than our target, we must take steps towards controlling it and protecting our economy."
Higher interest rates make borrowing money more expensive and encourage saving among consumers. Although slower price rises might translate into lower inflation levels over time, people with loans or mortgages charging variable interest rates are likely going to experience increased repayment costs.
According to Alastair Douglas, CEO of TotallyMoney: "Those with an average house costing £270,000 could see their monthly payments increase by an extra £26." Consequently, customers might end up paying approximately $482 more each month compared to December last year.
On the positive side for savers who have faced low returns on cash savings for years now due to historically low-interest-rate environment; this rate hike might result in the best returns on cash savings in over a decade.
In response to continuing concerns about rising inflation, especially with food prices experiencing their fastest annual increase since 1977, both the US Federal Reserve and the European Central Bank have also raised their respective interest rates. The ECB has chosen a more cautious approach of a .25 percentage point increase but remains open to further adjustments if needed.
Despite these increases, MPs have criticised major high street banks for not passing on the benefits to loyal savers, as savers are only being offered between 0.7% and 1.3%. New quarterly GDP figures are expected to be released tomorrow, which will undoubtedly play an essential role in shaping future policy decisions surrounding interest rates and economic stability efforts.