Here’s how UK interest rates compare with others around the world

As the Bank of England increases interest rates to 3%, we take a look at how UK borrowing costs compare to those in other countries.

What a difference a year can make! Just 12 months ago we had a much-loved queen on the throne, Boris Johnson was still in Number 10 and interest rates were virtually zero: the Bank of England base rate stood at just 0.1% and you could fix your mortgage for two years at 2.29%.

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Little did we know it, but the next year was waiting in the wings to unleash chaos on the global economy, and the days of ultra-low interest rates would soon be coming to an end.

The era of ultra-low interest rates

Those ultra-low rates had been in place for more than 10 years. After the 2008 financial crash, the Bank of England reduced the base rate from over 5% to just 1% over the course of a few months. What started as a short-term solution became a long-term plan as the central bank attempted to stimulate a lacklustre UK economy. Interest rates remained in the doldrums until early 2022, annoying savers but helping out mortgage holders as they struggled with spiralling house prices.

But the UK wasn’t alone. Around the world central banks kept a lid on interest rates, hoping to boost consumer spending and business growth.

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But now everything has changed. Rising inflation has forced central banks across the globe to push up interest rates, arguably to more realistic long-term levels. In the UK, interest rates have climbed from 0.1% to 3% in less than one year. That’s an increase of 2,900% and means the interest on a £10,000 loan at the base rate has increased from £5 to £161. Experts are predicting that interest rates are likely to reach 4.75% to 5% next year, before possibly falling back.

Interest rates around the world

Around the world, ultra-low interest rates were the norm at the end of 2021. The eurozone and Sweden had 0% rates and the US and UK were only offering a paltry 0.1% and 0.25% to savers. In Japan, bizarrely borrowers were actually paying to deposit money, with negative interest rates of -0.1%, aimed at countering deflation in the economy.

We are now mid-cycle, or possibly nearing the end of a cycle of increasing interest rates as central banks act to counter rampant inflation.

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The combined effects of the war in Ukraine, Covid-related supply problems and long-term quantitative easing have pushed inflation to a 40-year high in the UK. Inflation rose from 0.6% in December 2020 to 5.4% in December 2021 and hit 10.1% in October 2022.

Inflation in the US is slightly lower at 8.2%, as they are less affected by rising energy prices, producing much of their own.

During 2022, central banks in developed countries largely moved in lockstep, gradually raising rates, although there are still some outliers. The UK and US central banks raised interest rates first slowly, then more quickly as the scale of the inflation problem became clear.

Meanwhile, in Japan the government still maintained negative interest rates, propped up by quantitative easing, and China actually lowered interest rates.

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A far as future rate rises are concerned, it looks likely that interest rates will settle and stay at a higher rate for some time to come, possibly rising more before they fall back next year. How much they rise will depend on the speed at which inflation can be brought back under control.

Central banks are treading a careful tightrope as there’s a danger they increase rates too hard and too fast. The problem is that there’s a time-lag between raising interest rates and the impact on inflation. Raising rates too high could increase the risk of a deep and long-lasting global recession.