The Bank of England has raised interest rates by 0.75 percentage points to three per cent, the single biggest rise in the cost of borrowing since 1989.
It is the eighth time in a row that the Bank’s Monetary Policy Committee has voted to raise interest rates.
The decision means benchmark interest rates have hit three per cent for the first time since November 2008, in the midst of the financial crisis.
As well as affecting mortgages and savings accounts, interest rates also influence the interest charged on things like credit cards, bank loans, and car loans.
The Bank of England had previously expected the UK to fall into recession at the end of this year and it would last for the entirety of 2023.
It now forecasts that the UK economy already entered a downturn in the summer, which will continue next year and into the first half of 2024 – a possible general election year.
Chancellor Jeremy Hunt said: “The most important thing the British Government can do right now is to restore stability, sort out our public finances, and get debt falling so that interest-rate rises are kept as low as possible,” but he admitted “there are no easy options”.
Inflation, which hit 10.1 per cent in September, is expected to peak at 11 per cent this winter before falling next year.
But why does inflation cause interest rates to rise, and how high could they go?
Why are interest rates going up?
Interest rates are rising to try to ease soaring inflation, which is at a 40-year high of 10.1 per cent - well above the Bank of England target of two per cent inflation.
The idea is that by raising interest rates, households will spend less and this should mean inflation will drop.
Prices have been rising steadily since the easing of Covid restrictions for a number of reasons.
Pent-up demand meant people spent more money but, because companies are struggling to meet demand, prices are rising. Gas prices have also increased hugely since Russia’s invasion of Ukraine.
The Bank of England has therefore raised interest rates to try to control rising prices.
Raising interest rates makes borrowing more expensive, which should encourage people to borrow less money and therefore spend less. This should help curb inflation.
But the Bank of England also does not want to slow down the economy too much – so how much higher could interest rates get?
How high could interest rates rise?
There is no upper limit and UK interest rates could be increased again after Thursday’s (November 3) rise to three per cent.
Analysts suggest rates could reach 4.75 per cent next year.
However, that peak is lower than predictions had suggested a few weeks ago, when the Government was in some turmoil after its disastrous mini-Budget threw markets into chaos. Most of the mini-Budget plans have now been torn up, although a cut to stamp duty remains in place - as it came into effect on the day - and a cut to National Insurance is still due to happen from November 6.
The Bank of England’s monetary policy committee meets eight times a year to decide interest-rate policy.