Interest rates are expected to be increased again by the Bank of England as the cost of living soars.

The benchmark rate stands at 3% and is widely forecast to go up to 3.5% following the latest meeting of the Monetary Policy Committee.

It would be the ninth consecutive hike since December 2021. The rate is already at its highest level for 14 years.

The impact of a rate rise would be felt by borrowers and savers across the UK.

At its November meeting, the Bank increased its benchmark rate from 2.25% to 3% – the biggest single increase since 1989.

More rate rises are likely to come. Analysts suggest rates could reach 4.5% by the middle of next year.

However, that peak is lower than predictions had suggested when the government was in turmoil after its mini-budget was badly received.

The Bank’s monetary policy committee meets eight times a year to decide interest rate policy.

It is under pressure to put rates up because it has a target to keep inflation at 2%, but prices are currently rising at 10.7%, more than five times that level.

Mortgages

Just under a third of households have a mortgage, according to the government’s English Housing Survey.

After a period of ultra-low rates, many homeowners are now facing the likelihood of much more expensive monthly repayments. The Bank of England says about four million households face a higher monthly mortgage bill next year.

When interest rates rise, about 1.6 million people on tracker and variable rate deals usually see an immediate increase in their monthly payments.

An increase in the Bank rate from 3% to 3.5% would mean those on a typical tracker mortgage would pay about £49 more a month. Those on standard variable rate mortgages would face a £31 jump.

This would come on top of increases following the previous recent rate rises. Compared with pre-December 2021, average tracker mortgage customers would be paying about £333 more a month, and variable mortgage holders about £210 more.

Three-quarters of mortgage customers hold a fixed rate mortgage. Their monthly payments may not change immediately, but house buyers – or anyone seeking to remortgage – will have to pay a lot more now than if they had taken out the same mortgage a year ago.

There has been considerable upheaval in this market since September’s mini-budget, even though most of the policies that were announced have now been ditched.

An average two-year fixed deal, which was 2.29% in November 2021, is now just under 6% – a difference of hundreds of pounds each month in repayments for a typical borrower.

You can see how your mortgage may be affected by rising rates with our calculator below.

Bank of England interest rates also influence the amount charged on things such as credit cards, bank loans and car loans.

Even ahead of the latest decision, the average annual interest rate in October was 20.73% on bank overdrafts and 19.31% on credit cards.

Lenders could decide to put prices up further, in expectation of higher interest rates in the future.

Savings

Individual banks and building societies usually pass on interest rate rises to customers. The deals being offered now are better than anything seen for years.

But although this means savers get a higher return on their money, interest rates are not keeping up with rising prices.

This means the value of cash savings – its buying power – is falling in real terms.

The Bank has been putting rates up to combat rising prices – known as inflation.

Prices have been going up quickly worldwide, as Covid restrictions eased and consumers spent more.

Many firms have problems getting enough goods to sell. And with more buyers chasing too few goods, prices have increased.

There has also been a very sharp rise in oil and gas costs – a problem made worse by Russia’s invasion of Ukraine.

Raising interest rates helps to control inflation by making it more expensive to borrow money. This encourages people to borrow and spend less, and save more.

However, it is a tough balancing act as the Bank does not want to slow the economy too much. The Bank is predicting that the UK could be in recession – a period of economic decline – for two years which is longer than we have seen in comparable statistics.

Since the global financial crisis of 2008, UK interest rates have been at historically low levels. Last year saw rates of 0.1%.

The UK is affected by prices rising across the globe. So there is a limit as to how effective UK interest rate rises will be.

However, other countries are taking a similar approach, and have also been raising interest rates.

The US central bank has announced big rate rises which have taken its key rate to levels not seen for nearly 15 years.

Other central banks around the world have also raised rates, as inflation continues to cause problems in a host of major economies.