Interest rates to rise this week – what it means for YOU and your money explained

Borrowing money is the cheapest it had ever been in the UK as the coronavirus pandemic spurred the Bank of England to lower interest rates to an all-time low of 0.1 percent. But the tide is turning as life gets back to normal – and this could have a big effect on your finances as early as later this week.

The flagship interest rate has been below one percent since 2009, following the 2008 financial crash.

The first in a series of rises could come as early as the end of this week, as the Monetary Policy Committee will make an announcement on Thursday.

Curbing inflation is the key aim of raising interest rates, and this has become particularly apparent given the worldwide shortage of goods taking place currently.

Pent-up demand is pushing up the price of many of the things we consume and could be in the range of making prices unsustainable for everyday people.

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This spells bad news for the Bank of England, which has a mandate to keep the annual rate of inflation at two percent.

If the rate goes as low as one percent or as high as three percent, the Bank’s governor Andrew Bailey needs to explain this to the Chancellor of the Exchequer, Rishi Sunak.

Unfortunately, we’re already in that scope, given inflation is currently at 3.1 percent.

To add to the bad news, banks are expecting inflation to rise even further, possibly to as high as five percent before dropping back down again.

Theoretically, rising interest rates persuade the population to save instead of borrow and spend – and with less disposable income being used in the economy, the rate of inflation, theoretically, slows down.

Of course, this means Brits will be making changes about their spending and saving plans in the upcoming weeks.

This should include making changes to credit card payments and mortgages so they can retain as much of their income as possible.

Paran Singh, Lead Financial Advisor at TIC Finance, told Express.co.uk: ”We really recommend trying to get a fixed rate on your mortgage right now, because as soon as the BOE’s interest rate is increased then all of the best fixed-rate mortgage deals will disappear and you don’t want to be left regretful.”

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Some 74 percent of mortgages are on fixed-rate deals, and will only see a change in their repayments when the terms of their deal ends.

But some 850,000 are on ‘tracker deals’ which adjust with the rate changes made by their bank – which are highly likely to change when the Bank of England shifts the goalposts as early as this week.

Savers will be happier with the changes, as they will get bigger returns on the cash they stow away.

Mr Singh told Express.co.uk: “The news for savers is more positive, with the future likely to hold a better return on savings than we are currently seeing.

“Saving rates are going to see a gradual increase, so saving account owners need to be wary that they don’t lock into a poor rate now only to find themselves wishing they were saving elsewhere when rates increase.”

Those who are in debt will likely find themselves in a trickier position, as overdraft debts will likely be subject to higher repayment terms.

Mr Singh advised Express.co.uk readers: “For individuals in debt, overdraft rates are likely to go up.

“Although again, this won’t be of immediate effect, it’s important to pay off any overdraft debts ASAP.

“If you’re nervous about your current debt levels then speaking to an independent financial advisor is highly recommended.”

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