Bank of England raises interest rates: three ways 2022 impacts your finances

The Bank of England has raised the benchmark borrowing rate from 3.75% to 4%, marking the first increase in more than three years. As the central bank adjusts policy to keep price rises steady, many individuals are wondering about the three ways 2022 changes might affect their personal finances, particularly regarding savings, employment, and mortgage costs.

Rate-setters aim to curb inflation by encouraging reduced spending, which lowers demand for goods and services. This shift impacts businesses, as lower consumer spending can lead to reduced sales. Furthermore, the cost of borrowing for corporate investment has risen, which firms say limits their ability to offer new jobs or wage increases. Mitchell Barnes, founder of Ryse 3D, noted that companies may lean toward automation and robotics to maintain efficiency as labor costs rise, potentially impacting employment across various sectors.

Higher interest rates aim to control inflation but impact savings, employment, and borrowing costs for households.

Savings and borrowing impacts

For those with savings, the rate rise could be beneficial, as banks often offer higher returns on savings products compared to the low-interest environment of the 2010s. Financial experts suggest that savers should shop around to ensure they are getting the best possible rates, as keeping money in older, closed accounts often results in lower returns. Rachel Springall of Moneyfacts noted that loyal customers in closed accounts have historically missed out on significant interest compared to those in active, easy-access accounts. However, the rise in rates may also increase costs for renters, as landlords may pass on higher borrowing expenses.

Borrowers, particularly those on variable-rate mortgages, face the most immediate pressure. Approximately 500,000 homeowners on tracker mortgages will see their monthly repayments rise immediately, with a typical increase of about £31 per month following the 0.25 percentage point hike. Another 500,000 homeowners on standard variable rates may also see increases depending on their lender’s policies. Conversely, the 87% of mortgage holders on fixed-rate deals will remain unaffected until their current term expires.

Why it matters

The Bank of England's decision to raise rates significantly affects the cost of living for millions. It creates a complex environment where savers may see better returns, but borrowers and businesses face higher costs that could limit job growth and increase monthly debt repayments.