Inflation is sticking and the Bank of England is set to raise interest rates

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Just like jam on your fingers after making breakfast, it appears inflation is going to be sticking around. And it seems like the Bank of England is prepared to do what they can to clean the mess up by raising interest rates.

Here’s the latest on rising prices and how increasing interest rates could impact your finances.

What has the Bank of England said about inflation?

According to the BBC, Governor of the Bank of England, Andrew Bailey, made some interesting comments about inflation during an online panel of central bankers.

He all but confirmed that the UK’s central bank was going to have to step in and do something to try and squash increasing prices.

Why is inflation not going away?

The Bank of England has partly attributed sticky inflation to the unexpected rise in energy prices. But there are a number of other factors at play:

  • Rising food prices because of more expensive ingredients and higher production costs
  • Supply and logistics issues rolling over from the coronavirus pandemic
  • High demand for skilled labour in areas such as transport

All of this combines to create a witches brew of inflationary ingredients, and the higher prices are starting to scare people.

What will the Bank of England do about inflation?

There is no magic wand, and there are limits on what the central bank can do.

The only real monetary policy that can be used is raising interest rates. But seeing as the current base rate is 0.1%, the only way is up anyway. So it’s not really a surprise that the Bank of England is hinting at raising interest rates, but it may end up raising them sooner than expected.

How will raising interest rates impact your finances?

This is the important part of all this. A rise in interest rates could end up having a direct impact on your daily life.

Here are some of the different ways you may be affected by inflation leading to a rise in rates:

  • Your mortgage payments may increase depending on the type of mortgage you have
  • Higher interest rates may become available for savings accounts
  • The returns on your investment portfolio may be lower
  • You may have to pay a higher level of interest on your credit card
  • Economic growth may slow, which can lead to fewer job opportunities

How can you best prepare for higher interest rates?

What happens at the central bank to curb inflation will be out of your control. But there are some steps you can take to make sure your finances are in good shape:

  1. Consider a fixed-rate mortgage so that you have more clarity on your monthly payments.
  2. Hold off on locking your savings away at a low rate as better deals may be on the horizon.
  3. Make sure your investment portfolio is diversified by buying shares and assets from a range of different areas and industries.
  4. If you need one, try and lock in a decent 0% purchase credit card or look at a balance transfer card to reduce how much you have to pay back.
  5. Consider learning new skills or starting a side hustle to bring in more income from different sources.

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