The biggest interest rate rise since the 1980s is expected to be announced by the Bank of England on Thursday in an effort to control rising inflation which is contributing to the ongoing cost of living crisis crippling British households.

In a crunch meeting, the nine members of the Monetary Policy Committee will make a decision that could push up the amount that millions of mortgage holders have to pay their banks every month.

The consequential decision is expected to push up the Bank’s base interest rate from 2.25% currently to 3%, the highest since 2008 which will affect a range of lending options including mortgages.

Bank of England Governor Andrew Bailey said in October:  “As things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August.”

How does increasing interest rates reduce inflation?

But how does rising interest rates help tackle inflation?

The Bank of England will take steps to keep inflation low and stable known as monetary policy.

Higher interest rates will make it more expensive for people to borrow money encouraging the public to save rather than borrow meaning people will tend to spend less.

As a result, people are expected to spend less on goods and services overall meaning the prices of those goods rise more slowly due to less demand. Slower price rises mean a slower rate of inflation.

Following the announcement on interest rates on Thursday, the bank will also confirm its inflation expectations for the longer term, which are due to show that the cost of living will be much higher than the central bank’s 2% target next year.

Analysts at Deutsche Bank have said they expect the Bank of England to opt for a 0.75 percentage point rise with a split vote.

Experts at the firm said: “Conditioned on market pricing, the UK economy will likely fall into a deeper and more prolonged recession.”

Your Money Matters

Your Money Matters is a campaign launched by us and our sister titles across Newsquest to help you overcome the surge in the cost of living. This year has seen a whole host of household price increases — from the energy price cap rise to surging inflation and food prices — costing your family hundreds or even thousands of pounds extra per year. We’re making it our mission to look out for your cash, offering money-saving deals, competitions, giveaways and insightful stories from your community on the impact this cost-of-living crisis is having on our readers. The worldwide energy crisis exacerbated by the Ukraine invasion, the financial impact of the Covid pandemic, record inflation figures and a surge in the cost of goods, fuel and travel means we will all feel the pinch. Through our newspaper, we want to do what we can to help make your cash go further because we know your money matters.