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How will the latest Bank of England interest rate rise to 1.25% impact your finances?

Updated 02 February 2023

3min read

Craig Rickman
Senior Content Writer

On Thursday 16th June, the Bank of England raised interest rates by 0.25 percentage points to 1.25%, the fifth increase since December 2021. 

The last time UK interest rates changed five times in a 12-month period was 2008, the year of the global financial crisis. 

On this occasion, the Bank of England slashed the base rate from 5.5% to 2% to try and protect consumers from the impending ‘credit crunch’. 

Some 14 years on, interest rates are once again changing rapidly, though this time they’re going up. 

Bank of England raises interest rates to 1.25%: how will the latest rise effect your finances?

Whenever interest rates change, your finances are affected.

Here we take a look at why rates are on the up, and suggest the action you need to take. 

So why is the BoE raising rates?  

Interest rates play a crucial role in how much you spend and save. When interest rates go up, borrowing becomes more expensive and you receive higher interest on your savings. When rates go down, the opposite occurs. 

The big economic talking point at the moment is inflation, which is predicted to hit double-digits later this year due to rocketing fuel, energy and food prices. The UK’s central bank is raising rates to protect you from the resulting cost-of-living crisis. 

What is inflation?

Inflation is a measure of how much the price of goods and services change over time. These are day-to-day things such as food, white goods and petrol. 

While some inflation is good for the economy, too much can be harmful, especially if it’s rising faster than what you earn. And that’s exactly what’s happening right now. 

Regular real pay in the UK fell at the fastest rate in over two decades in April, as wages fell further behind rising prices.

Although pay growth leapt 3.8% during the month, the real rate of growth - after adjusting for inflation - fell 3.4%. In general terms, this means your pay packet can buy 3.4% less than it could the month before. 

Putting the current situation into context, the government sets the BoE an inflation target of 2%. According to the BoE, consistent 2% inflation makes it easy for businesses to set their prices and for you to plan for current and future spending.

With current inflation more than four times higher than its target, the BoE is raising rates to try keep the situation under control. 

What does this recent rate rise mean for your finances?

When interest rates are rising it becomes more expensive to borrow money.

If you’re spending more on the loans you have, such as your mortgage, you’ll have less to spend on other things throughout the month. If consumers are spending less, inflation should, in theory, come down. 

If you’re on a fixed-rate mortgage, your current payments will remain unaffected, at least until your current term expires. However, those of you on variable rate and tracker mortgages should see your monthly mortgage payments increase immediately. 

On the flip side, any money you have in savings, such as Cash ISAs, should start earn more with banks and building societies paying higher levels of interest.

However, as inflation is still significantly higher than interest rates, and are likely to be for some time, the real value of your investments may be reducing.

For example, if inflation is running at 9% over the course of a year, and your investments are paying interest at 2%, the spending power of this money will reduce by 7%.  

Could further rate rises be on the cards?

If inflation continues to rise, then further interest rate hikes are certainly possible.

However, the BoE will be paying closer attention to the effect of this recent increase on the cost-of-living crisis over the coming weeks and months. 

What you need to do

Regardless of whether you’re on a fixed or variable rate, it’s wise to seek mortgage advice to ensure you’re getting the best deal for your individual circumstances.

If you’re struggling to meet monthly repayments due to the interest rate hike, an expert mortgage adviser can help you explore ways of making things more manageable. 

This also applies if your investments are growing less than the rate of inflation.

By seeking expert financial advice, you can ensure that the value of your wealth is protected both now and in the future.

For more tips, guides and advice on the rising cost of living, make sure to visit our cost of living help page here.

Get further information on the 2nd February 2023 interest rate rise here.

Here at Unbiased, we can connect you with the right financial expert for your specific circumstances, who can help you achieve your financial goals. 

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About the author
Craig Rickman is senior content writer at unbiased.co.uk. He has been writing about personal finance and wealth management since 2016, including four years as a journalist at the Financial Times Group. Prior to this, Craig spent eight years working as a regulated financial adviser. He holds the CII level 4 Diploma in Financial Planning.