House prices, inflation, fuel: Your questions answered on the interest rate rise

ITV News Business and Economics Editor Joel Hills responds to viewer's practical questions about the recent gloomy economic news

On Thursday, the Bank of England (BoE) raised interest rates to 1.75% from 1.25% – the highest level since January 2009.

A warning has also been issued by the BoE that the UK is set to plunge into the longest recession since the financial crisis.

This comes during a cost of living crisis, with households around the country struggling to make ends meet.

So what does this mean for the economy, and for you? In the latest edition of Ask ITV News, we answer your questions on interest rates.

Question 1: Olivia, Sale

"I work in property. What will interest rate rises mean for house prices?"

Joel Hills: History tells us house prices usually fall during recessions and often crash.

That was not the case during the pandemic when the economy contracted deeply and house prices took off for the moon - propelled by stamp duty holidays, lockdown savings, a race for more space and low interest rates.

The era of cheap borrowing looks like it’s over. Mortgage repayments are rising, and affordability of mortgages is being stretched. 

Markets expect Bank Rate to reach 3% next year but even if it does, that’s still low by historical standards.

What happens next depends to a large extent on what happens unemployment. People tend to lose their homes when they lose their jobs, and when people lose their jobs, banks tend to get more jittery about lending.

Question 2: David, Canterbury

"I run a food bank in Canterbury. How will interest rate rises affect the most vulnerable in society?"

Joel Hills: Interest rates rises will take money out of the pockets of borrowers, but high and rising prices are the real killer. 

When inflation hits 13% a year it leaves everyone feeling poorer - but it’s utterly ruinous for those of on the lowest incomes who tend to spend a greater proportion of their money on food and energy.

Whoever becomes the next prime minister may wish to cut taxes, but they will be under enormous pressure to spend more to support people this winter and beyond.

As it stands, the National Institute for Economic and Social Research thinks 1.2 million households will be unable to cover their outgoings. 

Question 3: Bashir, South London

"I'm a taxi driver. How will interest rates affect fuel prices?"

Joel Hills: The short answer is they won’t. The price of petrol and diesel is set by retailers based on the market price of crude oil, the cost of refining it and taxes like Fuel Duty and VAT. 

Pump prices hit a recent high due to a surge in global demand for oil as economies unlocked after the pandemic, as well as sanctions on Russian oil.

The oil price and pump prices have fallen slightly in recent weeks. What happens next will depend to a large extent on the war in Ukraine and the size of the recession we face. As we found out during pandemic, the oil price can fall significant during downturns. 

Question 4: Jenny, Stockport

"I do a lot of work abroad. Are interest rates in other countries going up too?"

Joel Hills: Yes. Many countries are suffering painfully high levels of inflation, including US, the Eurozone and Russia  - where prices are rising by around 16% a year. 

The main inflationary pressures in the US is a shortage of workers. The main inflationary pressure in Europe is sky-high energy prices.

In the UK we have both problems, which is why Bank of England predicts inflation will be higher for longer here. 

Question 5: Steph, Liverpool

"Why has the Bank of England increased interest rates, and what does this mean for inflation?"

Joel Hills: The Bank argues that most of the high inflation we are suffering is being caused by the aftershocks from the pandemic and war in Ukraine. 

The Bank says there is nothing it can do about this “imported” inflation, we have to accept it is making us poorer.

Higher interest rates will increase the squeeze on living standards, and make the recession we face deeper. But the Bank says it needs to act because there are signs that inflation is starting to feed itself domestically.

If it doesn’t act, an awful situation could become even worse.

Want a quick and expert briefing on the biggest news stories? Listen to our latest podcasts to find out What You Need To know... 

Question 6: Hannah, Hampshire

"I'm a primary school teacher. How can I explain interest rate rises and their impact to my pupils?"

Joel Hills: I would say to your primary school pupils:

Imagine you want to buy something expensive like a new bike but you don’t have the money.

But you do know someone willing to give you the money for the bike as long as you give the money back plus a little bit extra because they can’t use the money while you have it.

The money they give you is called “a loan” and that little bit extra you give back is called “interest”.

So when interest rates go up it makes it more expensive to borrow money and means you are more likely to decide you can’t afford a new bike.

What will the recession look like and will the government's support packages be enough to see households through the winter?