The Bank of England surprised everyone in December by raising interest rates.

It did so from the all-time low of 0.1% to 0.25% – still a relatively low level by historic standards. For example, look back to 1990 and the bank’s interest rate was 15%.

More recently though – pre-2008 financial crisis – rates hovered above 5% for nearly a decade. So we’re starting from a low base with rate rises now.

But this will still affect your finances. And the Bank of England could keep hiking this year, with rises up to 1% possible.

Why raise interest rates?

The Bank of England’s primary objective for its ‘monetary policy’ is to keep inflation at bay. Unlike the US, it has no particular mandate regarding employment.

It is tasked by the Government to keep inflation to as near to 2% as possible. At the time of writing, inflation is a wallet-busting 5.1% on the consumer price index (CPI) measure.

By hiking interest rates in response to this, the Bank of England is attempting to quell demand. The ‘real world’ effect of this is that borrowing becomes more expensive, leaving businesses and households with less money to spend – forcing people to tighten their belts and slow down consumption.

At least, that is the economic theory. In practice the economic picture is more complicated. But for the purposes of our personal finances, this is the most important element to have in mind.

Impact of inflation

When thinking about how interest rate rises might affect your money, it’s first essential to consider why those rates are going up.

As mentioned above, rates are hiked because inflation is intolerably high. Inflation is the measure of how fast consumer prices are increasing, based on a balance of supply and demand.

You can have two core feeders into rising prices – either demand goes up, or supply becomes constrained. We have inflation now because of a mixture of both.

Lockdowns in 2020 and 2021 saw household spending plummet, leading to people having bigger than usual savings pots. Plus, the financial assistance from the Government in the form of the furlough scheme and other aid helped keep a lot of workers’ incomes relatively stable. This means when the economy opened up people had more money to spend.

This in turn caused a surge in demand for products and services which complex supply chains around the world struggled to fulfil. In combination then, the two effects have forced inflation much higher, quickly.

The net result of this is a range of goods and services we buy every day have become more expensive, faster than anyone expected. Everything from grocery bills, to clothes, fuel for our cars and energy supply to our houses has shot up in cost.

With this the state of the economy then, hiking interest rates becomes inevitable. But how does that in turn impact your personal finances and wealth?

Essentially, unless your earnings are rising to match the rise in the cost of living, you will find it harder to pay for the things you need each month.

It is likely that inflation will fall back down as a result of the rate hikes, and goods and services will rise in price less quickly. But it takes time for the effects to be felt in this sense.

There is however a more immediate impact of interest rate hikes on our personal finances.


The first, and usually most immediate impact of a rate rise, is to make the cost of debt rise.

When the Bank of England hiked rates in December, banks almost instantaneously announced they were hiking mortgage rates on new products, and those products which had tracker rates.

The same is true for personal loans without a fixed rate (although these are uncommon), and credit cards too. It is unfortunately quite cynical, but like when petrol and diesel prices rise, the banks pass on rate rises almost immediately to their customers.

It can be tricky to avoid these rises. If you have a mortgage which tracks the base rate, now would be an excellent time to consider remortgaging to a fixed rate. If you’re looking to get a new mortgage, then there really isn’t much you can do other than making sure you try to get the best deal possible, or have the biggest deposit you can to minimise the debt you take on.

If you have unsecured debts such as credit cards, try to pay off as much as you can as soon as possible. This will save you significant future costs to servicing that debt. Typically, providers have to give you 30 days’ notice if they do hike their rate, and you have 60 days to pay off the balance before it kicks in.

Savings rates

When interest rates go up, savings rates should go up too. Indeed, before the bank rate was hiked, savings rates were beginning to rise.

But there is a big caveat in this. The part of the cash savings market that saw rises was only in the top end with niche smaller providers.

Big retail banks such as HSBC, Lloyds and NatWest have continued to keep their average rates on offer extremely low. The current rate of interest offered by NatWest, for example, is 0.01% in its Instant Saver account, an extraordinarily miserly offer.

That compares with the current top rate instant savings account (at the time of writing) which is offered by Harpenden Building Society and comes with a rate of 0.75%.

Essentially the message here is that savings rates will go up now the bank rate is going up too. But if you want your money to work harder, it has to be placed somewhere where it will get the best rate possible.

For comparison of rates, a useful resource is Savers Friend, which is operated by financial data firm Moneyfacts.

But in reality, unless it is short term cash or a rainy-day fund, it’s likely to be better placed in investments to grow over time.


Finally, although indirectly, rising interest rates affect investments.

This happens through a more surreptitious process though and isn’t as obvious as a bank hiking rates. But some investments will begin to underperform once interest rates rise.

This happens for a multitude of reasons, but largely comes down to the bulk of investors moving away from fast growth stocks, such as tech, and into companies that benefit from rising rates, including (ironically enough) banks, manufacturers which benefit from lower material prices, home builders, and others.

Ultimately predicting how interest rates will affect particular investments is a difficult process. If unsure, then speak to your financial adviser who can help you figure out the best solution to your investment needs.