TBA Global

Why have interest rates gone up?

On June 22nd, the central bank raised its benchmark interest rate by 0.5 percentage point to 5%, impacting various financial products such as savings accounts and mortgage loans. Prior to this, in order to curb persistently high inflation rates, the central bank had been consistently raising its benchmark interest rate. The good news is that this policy has had an effect, and inflation rates have stabilised in single digits in recent months. However, compared to the target inflation rate of 2%, the current inflation rate is still significantly higher, at around 9%.

The central bank stated that although raising interest rates will bring greater pressure to those with existing mortgage loans, savers will benefit from it, and in the long term, if rates are not raised now, high inflation will persist for a longer time and affect everyone, especially low and middle-income individuals who will be disproportionately affected.

Prime Minister Rishi Sunak and the Chancellor Jeremy Hunt both firmly believe that raising interest rates is the best way to reduce inflation, and they expect inflation to significantly decrease this year. However, the exact extent to which rates will rise before that is still uncertain. The central bank stated that changes in the benchmark interest rate will depend on future economic developments and inflation forecasts for the next few years.

The central bank will regularly review the economic conditions and decide whether to adjust interest rates. If they assess that high inflation will persist for a longer period, they will consider further raising interest rates to ensure inflation comes down. In fact, the decision on the latest interest rate is imminent; it will be announced on August 3rd, next Thursday. According to reports, this time there is a possibility of raising the rate by another 0.25 percentage points to 5.25%.

If the interest rate is raised this time, the cost of variable-rate loans will continue to increase, and fixed-rate loans will face the impact of higher rates after maturity, leading to changes in people’s repayment ability and willingness to take on loans. Borrowing money will become more expensive, while returns on savings will be higher. As overall consumer spending decreases, price increases will be curbed or rolled back, achieving the goal of reducing inflation.

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