Inflation—a general increase in the price of goods and services—is at a 30-year high. Following the easing of COVID-19 restrictions, consumers were spending more across the UK and even worldwide. But with many businesses struggling to get hold of sufficient stock to sell, too many buyers were chasing too few goods, causing prices to climb. And now, the sharp rise in oil and gas costs—made worse by Russia’s invasion of Ukraine—has only added to financial burdens.

high interest rates

In response, the Bank of England (BoE) raised interest rates to 1% in May 2022 to help tackle rising inflation. This article provides an overview of interest rates, discusses how they may affect you and outlines ways to reduce costs .

Interest Rates Explained

Interest is the amount you pay for borrowing money and the amount the bank pays you for saving with them. Interest rates are typically expressed as an annual percentage of the loan and/or savings. For example, if a £1,000 loan has an annual interest of 10%, you’ll pay back £1,100 over a year. Or, if you’re saving, you’ll be paid a percentage of your savings into your account.

The Bank Rate

The interest rates set by financial institutions (eg high street banks) are influenced by the wider bank rate (also known as the “base rate”). Set by the BoE, the bank rate aims to help manage economic activity. For example, to help during the COVID-19 pandemic, the bank rate was cut, reducing the rates at which banks could borrow from the BoE.

Subsequently, banks and building societies were able to pass along this reduction to customers, lending to them at lower rates.

How Will High Interest Rates Affect Borrowing?

With the bank rate recently increased to 1%, borrowing could become more expensive. Mortgages, in particular, may be affected. Those with a fixed-rate mortgage won’t see a change immediately. However, those on a variable rate will likely see an increase. In fact, the current bank rate of 1% will add around £300 a year to a 2.25% variable mortgage of £200,000. Although this may seem manageable now, the BoE could raise interest rates again in subsequent reviews. Therefore, it’s essential to make sure you can afford any interest rate increase before applying for a mortgage. If you’re unsure, use a mortgage affordability calculator.

Don’t forget, credit card and loan rates could also increase. Display similar caution when deciding on such applications.

How Will Spending Be Affected?

When interest rates rise, it becomes more expensive to borrow but more favourable to save. As such, people are encouraged to spend less and save more. By increasing the bank rate, the BoE is expecting a decrease in spending, which should—in time—calm inflation and bring down prices.

However, it’s likely to get worse before it gets better. The BoE predicts inflation will hit 10% by the end of the year.

Furthermore, energy bills continue to rise, an additional burden to already stretched finances. The energy price cap rose 54% in April, according to the Office of Gas and Electricity Markets (Ofgem). A further increase is expected when the price cap is reviewed in October.

To cope with rising costs both now and in the immediate future, it’s important to examine how to reduce your expenses right away.

Tips for Reducing Expenses
  • Cut back. Analyse your spending habits to determine which expenses are necessary and which are expendable. For example, by pausing or cancelling rarely used subscriptions and memberships, you could save money each month.
  • Join reward programmes. Check to see if joining available loyalty programmes will benefit you. Supermarkets and petrol stations often offer discounts or even free goods to loyal customers. For additional savings, take time to compare prices across shops and utilise discount vouchers and coupons.
  • Make essentials last longer. Examine how best to make regular expenses last. For instance, by avoiding food waste, you can make your groceries go further. Consider making a weekly meal plan and freezing any leftovers.
  • Talk to your employer. Discuss your financial situation with your employer to see if they can provide helpful resources or programme recommendations.

Consider these tips for reining in spending:


With inflation levels at an all-time high, it’s a financially tough time for many. And although the BoE has increased the bank rate to help tackle inflation, any positive change won’t be immediate. In fact, the BoE has indicated it may raise the bank rate even further. The bank meets approximately every six weeks to decide on monetary policy. Since December 2021, the BoE has increased the bank rate at every meeting, signalling that the road toward economic recovery may be long.

High costs, coupled with the additional cost of borrowing, are creating financial stress across the UK. If you’re struggling, don’t suffer in silence. Speak to your supervisor or human resources for financial guidance.