The Bank of England is poised to take action against the surging prices by raising interest rates for the 13th consecutive time. Recent official data revealed that inflation remained stagnant at 8.7% in May, further necessitating the Bank's intervention. Despite ongoing debates surrounding the efficacy of interest rates as a tool to combat inflation, they continue to be the primary lever employed by the Bank. Analysts predict that the benchmark rate will increase from its current 4.5% to either 4.75% or, potentially, 5%. However, a substantial hike to 5% could raise concerns about the Bank's control over inflation.
Although such a decision will likely create additional challenges for homeowners, it may present an opportunity for savers. The Bank rate is already at its highest level in approximately 15 years, having steadily risen since December 2021 in response to the mounting cost of living. The logic behind increasing interest rates is to make borrowing money more expensive, subsequently reducing spending and curbing demand, ultimately alleviating the upward pressure on prices.
Confirmation of the interest rate hike is expected after the Bank's independent Monetary Policy Committee convenes at 12:00 BST on Thursday. Sir Charlie Bean, former deputy governor of the Bank of England for monetary policy, indicated that he would vote for a 0.5% increase given the adverse inflationary developments since the last meeting. The committee's decision will revolve around the magnitude of the rate adjustment—whether to take a significant step immediately or opt for a smaller increase while signaling potential future hikes.
Market experts warn of the substantial risk associated with a 0.5% rate hike, fearing it may convey a loss of control over inflation to the markets. Shortly after the announcement, Prime Minister Rishi Sunak is expected to emphasise his commitment to halving inflation by the end of the year during a speech. He will express a "deep moral responsibility" to ensure the preservation of earned money's value.
Critics, including Labour's shadow chancellor Rachel Reeves, have scrutinised the government's handling of rising interest rates and their impact on mortgage holders. Reeves asserts that the Conservatives must take responsibility and act promptly instead of engaging in distractions.
On Wednesday, the Office for National Statistics surprised analysts by reporting that inflation remained unchanged at 8.7% compared to the previous month. This unexpected figure was driven by escalating prices of flights, second-hand cars, and a persistent increase in supermarket food prices. Core inflation, which excludes volatile factors such as energy, food, alcohol, and tobacco prices, continued to rise at its fastest rate in 31 years. The UK's inflationary trend sets it apart from countries like the US and Germany, where inflation is on the decline.
Chancellor Jeremy Hunt expressed support for further interest rate increases, emphasising the government's commitment to assisting the Bank of England in reining in inflation. The government's target is to reduce the inflation rate to 5% by the end of the year, while the Bank's long-term goal is 2%.
The Bank's struggle to contain inflation poses a significant challenge, impacting various loans as interest rates rise. More than 1.4 million individuals with a tracker and variable rate mortgage deals will experience an immediate increase in their monthly payments if the Bank rate rises from 4.5% to 4.75%. This adjustment would mean an additional £24 for typical tracker mortgage holders and £15 for those with standard variable rate mortgages. The cumulative effect of previous rate increases means average tracker mortgage customers pay approximately £441 more per month compared to pre-December 2021, while variable rate mortgage holders pay around £282 more.
If the rate reaches 5%, tracker mortgage holders would face an additional £47 per month, and standard variable rate mortgage holders would see a £30 increase.
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