Interest rates rise to 1% adding £612 a year to mortgages – and Bank warns inflation could hit 10%

MILLIONS of households have been dealt another blow today as the Bank of England has hiked interest rates for the FOURTH time.

The Bank of England has today raised the base of interest to a 13-year high of 1%, as it warned that inflation could hit 10% within months.

The move will make the cost of borrowing, including loans, credit cards and mortgage repayments more expensive.

It's a significant rise from December, when the Bank raised rates from a rock-bottom level of just 0.1%, and the highest level since February 2009.

And it means more misery for households who are already grappling with a cost of living crisis.

Richard Lim, chief executive at Retail Economics, said: "The Bank is treading a tightrope between supporting the economy and trying to keep inflation under control."

The Bank of England typically puts up interest rates in a bid to help lower inflation.

Inflation has already hit 7% and the Bank today warned it could reach 10% this year.

In its report today, it said: "Prices are likely to rise faster than income for money people, which means people will be able to buy less with their money."

It predicted that inflation would fall to 2% (the Bank's target) within two years but warned there could be further rate hikes to come.

The Bank of England has also warned that the UK economy will go into recession this year.

And economists at Berenberg have warned that we could already be in the early stages of a downturn.

A recession is defines as two consecutive quarters of negative growth and the latest figures show economic growth has slowed to just. 0.1%.

Lim said: "There is a cauldron of cost pressures pushing inflation up, including commodity prices, supply chain issues and the Russia/Ukraine crisis.

"That means raising rates is less effective at curbing inflation than it was a decade ago."

Hiking rates helps rein in inflation when it's being caused by people splurging on non-essentials such as holidays and ramping up their borrowing just because it's cheap.

But this is not the case at the moment as millions of households are battling a cost of living crisis.

Scott Taylor-Barr, financial adviser at Carl Summer Financial Services, said: "Raising interest rates may be the right way to tackle inflation when people are flush with cash, but that's not where we are.

"We're seeing inflation rise due to the sharp increases in essentials - food, energy and fuel. Adding to the pain seems unlikely to have much impact - unless the aim is to stop people eating and heating their homes."

Ross Boyd, chief executive at mortgage comparison site Dashly.com, said: "Household finances are already being squeezed from all angle and interest rate increases could see the cost of servicing certain forms of debt rise.

"There could be a brutal few months, or even years, ahead."

But while experts argue that raising rates isn't appropriate during a cost of living crisis, the move had been widely expected.

In fact, Halifax apologised after its wrongly emailed customers telling them the Bank had hiked rates days before its meeting.

The Bank of England said: "[We] can't do anything about the global supply problems or the energy prices that are currently pushing up inflation.

"But we do have tools to make sure inflation comes back to our 2% target - the main one is to increase interest rates.

"We may need to increase interest rates further in the coming months. But that all depends on what happens in the economy."

What does a rate hike mean for my finances?

Households with variable or tracker mortgages are likely to feel the effects of an interest rate hike quickest.

The interest rates on these mortgages are linked to the Bank's base rate, so when that goes up, so do your monthly repayments.

According to figures from AJ Bell, if base rate goes up to 1%, it will increase repayments on a typical £250,000 mortgage by £32 a month - £384 a year.

On a £400,000 mortgage it would mean repayments go up by £51 a month - or £612 a year.

If you have a fixed rate mortgage deal, then you won't be affected by rate hikes.

But Boyd warns: "A lot of people are going to experience 'rate shock' when they next come to remortgage and find the days of rock-bottom interest rates are over."

The interest rate on the average two-year fixed rate mortgage is now 2.11% - up from just 1.2% in September.

Laith Khalaf, head of investment at AJ Bell, said: "Anyone on a variable rate mortgage can still benefit from getting a fixed deal now, even if it is at a higher rate than if they had fixed last year."

TSB has already confirmed that it will increase rates for homeowners on variable rate mortgages.

The rate will increase by 0.25% from June 1.

HSBC said mortgages linked to base rate would be adjusted from the next working day (tomorrow).

Metro Bank, Lloyd's Bank, Halifax, Bank of Scotland said they are reviewing rates on their mortgage products.

If you're taking out other forms of debt such as a loan or credit card, there is also a chance you could see the interest rates on these go up.

Khalaf said: "Anyone with a decent credit rating should look to move their debt to a cheaper rate of 0% deal.

"Those who have poorer scores have find themselves trapped on higher cost debt. But it's still important to look around for better rates or speak to experts such as Citizens Advice or debt charities."

The main positive to interest rates rising is that it should mean you can earn more interest on your savings.

However, no savings accounts are currently offering interest that outstrips inflation, meaning money in the bank loses spending power.

The top-paying account is currently from Chase Bank and pays interest of just 1.5%.