Thursday, the Bank of England raised its primary interest rate to a new 15-year high and said it would stay high for a while to bring down persistently high inflation. This could be bad news for people whose rents and bills are going up during a crisis in the cost of living.
The central bank raised interest rates by 0.25%, which was expected by most people. This was the 14th increase in a row. The bank said that some of the risks from more persistent inflation, like higher wages, had “begun to crystallise,” which is why it raised the cost of borrowing.
People and companies who were already struggling feared that the bank would repeat its huge half-point increase from June. But the fact that inflation fell more than expected to 7.9% last month made it less critical to act as quickly again.
In new predictions, the central bank said it thinks inflation will drop to 4.9% by the end of the year, and price increases for food will slow down.
Andrew Bailey, governor of the bank, said, “The fact that inflation is going down is good news.” “We know that inflation hurts the poor the most, and we need to make sure it goes all the way down to the 2% target.”
With inflation four times that high, most people think the bank will raise rates again, possibly in September, before taking a break to let the effects of the previous increases work through the economy. Higher interest rates have consequences that don’t show up right away. This is especially true in the housing market, where many people will have to refinance their debts at a higher cost in the coming months.
Bailey told reporters, “I don’t think it’s time to say that it’s all over and stay where we are for now.” “We need to stay based on facts.”
In new language that seems to have killed hopes that the bank will change course soon, it said it would make sure borrowing costs stay “sufficiently restrictive for long enough to return inflation to the target.”
The U.S. Federal Reserve and the European Central Bank also raised rates last week, but because their inflation rates are much lower than the U.K.’s, it is thought that they are closer to a change in direction. Price increases have slowed down to 3% in the U.S. and 5.3% in all 20 countries that use the euro currency.
Central banks around the world have been raising borrowing costs to fight inflation caused by higher energy prices after Russia invaded Ukraine and supply chain problems as the global economy recovered from the coronavirus pandemic.
Higher interest rates help slow down inflation by making it more expensive for consumers and companies to borrow money to buy homes, cars, and equipment. This also slows down economic growth, but the bank seems sure that the British economy will stay strong in the next few years, even though unemployment is starting to go up.
“The price of taming inflationary pressures caused by Britain’s tight labour market is an increase in unemployment of about 350,000,” said James Smith, research head at the Resolution Foundation, an economics think tank.
There are a number of reasons why inflation is higher in the U.K. Many experts say it’s because Britain left the European Union, which hurt trade and made businesses pay more. Others say that the Bank of England is more to blame because it took too long to start raising interest rates, which let inflation spread to more parts of the economy, most notably higher pay.
No matter who is to blame, it has been a hard time for U.K. households, whose mortgage rates or rents have skyrocketed while they fight to make ends meet during a cost-of-living crisis marked by higher prices for food and energy.
But many people haven’t yet felt the pain. Unlike in the U.S., most homes in Britain only lock in their mortgage rates for a few years. This means that soon, those whose deals are up will have to pay much more to borrow.
About 2.5 million of these deals will end by the end of next year, and Bailey says that a million families will have to pay an extra £500 ($640) a month on their mortgages by 2026.