Why are interest rates rising and how high could they go?

·2-min read
The Bank of England has raised interest rates again to help cool rocketing inflation. (PA Archive)
The Bank of England has raised interest rates again to help cool rocketing inflation. (PA Archive)

Interest rates have risen to 1% from 0.75% as the Bank of England hopes to slow inflation.

The Bank of England warned today that inflation will reach 10% by the end of the year–and as inflation and interest rates are closely linked, this will have a knock-on effect on the Bank of England’s base rate.

Interest rates in the UK have been at historically low records following the global financial crisis of 2008–in 2021, the rates were as low as 0.1%. But the Bank’s interest rate is now at its highest since March 2009.

But why does inflation cause interest rates to rise, and just how high could they go?

Why are interest rates going up?

Inflation is rising prices–following the easing of Covid restrictions, people are spending more money.

But because companies are struggling to meet demand, prices are rising. Gas prices have also increased following Russia’s invasion of Ukraine.

The Bank of England has raised interest rates to try to control rising prices.

Raising interest rates makes borrowing more expensive, which should try to encourage people to borrow less money and therefore spend less money. This should help curb inflation.

But the Bank of England also does not want to slow the economy too much–so how much higher could interest rates get?

How high could interest rates rise?

It is expected that interest rates in the UK could reach 1.25%. However, this is not an upper limit, so they could rise further.

Bank of England Governor Andrew Bailey warned of further interest rate rises and said “some degree of further tightening of monetary policy might still be appropriate in the coming months.”

The Times Money Mentor reported that experts predict that the base rate could rise between 1.5% and 2% by the end of 2022.

This is Money reports that the bank rate could rise 2.5 per cent by the middle of next year, before falling back to 2 per cent at the end of the forecast period.

The Office for Budgetary Responsibility believes that interest rates could reach 3.5% if the UK continues to experience longer and higher inflation, as reported by the BBC.

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