Key points:

• They have raised Bank Rate by 0.25 percentage points to 4%

• Conflict in the Middle East has disrupted the transportation and supply of energy, raising its price and pushing up households’ motor fuel costs and utility bills

• Inflation has risen to 3.5% and we expect it to rise even further to about 5% by mid-2027 as higher energy prices have their knock-on effects; higher bills could force businesses to increase their prices to cover the cost, for example

• So far, there is little evidence of significant knock-on effects on other prices and wages; but energy costs have been high for long enough now that we expect those knock-on effects to eventually kick in

• The economy has been more resilient and activity has been stronger than expected – this is good news, but it adds to the risk that higher energy prices affect other prices; so, we must act now to reduce their impact

• Raising Bank Rate should help limit how far higher energy costs feed into prices in the economy more generally

What are interest rates?

Interest is what you pay for borrowing money and what banks pay you for saving money with them.

If you are borrowing money, the interest rate (or lending rate) is the amount you are charged for doing so. If you are a saver, the interest rate (or savings rate) tells you how much money will be paid into your account.

Both are expressed as a percentage of the total amount you have borrowed or saved.

So, if you borrowed £100 with a 1% lending rate, you’d have to pay £101 a year later. If you put £100 into a savings account with a 1% interest rate, you’d have £101 a year later.

What is Bank Rate?

It is the core interest rate in the UK and it is our job to set it.

It is the rate of interest we pay to commercial banks, building societies and financial institutions that hold money with us. It is also the rate we charge on loans we may make to them. It, therefore, affects their own lending and savings rates. For example, when we raise the Bank Rate, banks will usually increase how much they charge their customers on loans and the interest they offer on savings. And the reverse if we lower it.

How do interest rates affect inflation?

Interest rates influence how much people spend, and that affects how shops and businesses set their prices.

Higher interest rates mean higher payments on many mortgages and loans, meaning people must spend more on them and less on other things. Saving becomes more attractive because the returns are higher and it becomes more expensive to take out a loan. These things all discourage consumers and businesses from spending.

When customers spend less, businesses are less willing or able to raise their prices. When prices don’t go up so quickly, inflation falls.

Lower interest rates can have the reverse effect. If payments on mortgages and loans go down, people will have more money to spend on other things. Savers will get a smaller return and, therefore, may feel less motivated to put their money away. It will be also cheaper for potential borrowers to take out a loan – and use that money to make big purchases.

All of these factors encourage spending. When people spend more, this means demand is high. And when demand is high, businesses often raise their prices, pushing up inflation.