The Bank of England has unveiled its biggest interest rate rise in more than 30 years – which could in turn lead to homeowners paying hundreds of pounds more on their mortgage.

The Bank’s nine-strong Monetary Policy Committee decided to hike the base interest rate from 2.25% to 3%, a jump of 0.75%.

That makes the base rate the highest since 2008 – while the jump in rates is the biggest single increase since 1989.

Chancellor Jeremy Hunt said of the rise: ‘Interest rates are rising across the world as countries manage rising prices largely driven by the Covid-19 pandemic and (Vladimir) Putin’s invasion of Ukraine.

‘The most important thing the British government can do right now is to restore stability, sort out our public finances, and get debt falling so that interest rate rises are kept as low as possible.

But why have interest rates gone up, and how do they help tackle inflation?

Here’s what you need to know…

Why have interest rates gone up?

According to the BoE, interest rates have been rising in a bid to bring inflation down.

Their website says: ‘The cost of living has risen sharply over the last year. The speed of that increase is called the rate of inflation.

‘It’s our job to keep the UK’s rate of inflation low. We have a target of 2%.’

Inflation rates are currently higher than that due to the price of goods coming from abroad and large increases in the cost of energy.

The BoE also attributes this to more job vacancies than there are people to fill them, which means employers are having to offer higher wages to attract job applicants.

‘It’s likely that inflation will keep rising this year and start to come down next year. We expect it to be close to our 2% target in around two years’ they say.

How do rising interest rates help inflation?

Rising interest rates increase the cost of borrowing money, which encourages more people to save their money rather than spend it.

As the demand for goods and services falls, the theory is that this will stop prices from rising as shops and retailers are encouraged to drop prices in order to encourage more people to make purchases.

But higher interest rates don’t work straight away, as Bank of England looks at what will happen in the economy over the next few years, rather than just what is happening now.

How will this affect the public?

With higher interest rates, interest payments on credit cards and loans become more expensive.

This encourages people to borrow less and save more, lowering inflation.

However, this can be worrying for members of the public as costs towards things such as mortgages rise.

Money Saving Expert (MSE) has offered guidance on what the rise of interest rates will mean for mortgages and savings.

They said: ‘The vast majority of mortgage holders in the UK have a fixed-rate mortgage, so for most, nothing will change.’

MSE also highlighted that lenders may raise standard variable rate (SVR) or ‘discount’ mortgages, and rates will increase on ‘tracker’ mortgages.

When it comes to saving accounts, MSE advised: ‘The base rate increase could affect all types of savings accounts.

‘In general, savers benefit from base rate rises – though some high-street banks can be slow to pass increases on to customers, and new best-buy deals don’t always emerge straightaway.’

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