“Mortgage misery for millions.” “Rate Hike Nightmare.” these were just two serious headlines UK home page The Bank of England was hit hard on Friday, the day after it announced a surprisingly big hike in interest rates.
With inflation continuing to remain high, the country’s central bank officials took stronger-than-expected action on Thursday, raising rates by half a point to 5 percent, the highest level in 15 years.
“We know it’s going to be tough,” said central bank governor Andrew Bailey, acknowledging that people with mortgages and other debt would be concerned about the impact of the change on their finances. “But if we do not raise rates now, the situation may worsen later,” he added.
The central bank has already raised interest rates 12 times since December 2021 and yet Britain’s inflation rate in May is stuck at 8.7 per cent, the same as last month. This is more than twice the rate of the United States and significantly higher than the inflation of Britain’s neighbors in Western Europe.
the pressure is on Mr Bailey has been asked to explain why Britain’s situation looks worse and prove that the bank has its inflation problem under control. “Excuses, excuses,” scoffed the London newspaper The Times in an editorial this week, arguing that Mr. Bailey’s “alibis are wearing thin.”
Even though criticism of the bank’s underestimation of price increases has intensified, Mr Bailey’s job is unlikely to be under threat. Prime Minister Rishi Sunak and his Chancellor Jeremy Hunt have said they support the bank’s efforts. Both are wary of attacking the bank after the economic turmoil was initiated by the previous prime minister, Liz Truss, partly because she questioned some of Britain’s independent institutions.
The Bank of England was given independence in 1997 regarding the way it operates, but the government sets the inflation target and appoints the governor. Mr Bailey’s term will not expire until 2028.
But his reputation may be at stake. Public confidence in the Bank of England is at its lowest level since 1999. Only 21 percent said they are satisfied with the way the central bank operates in setting interest rates to control inflation. According to a survey published by the bank last week. The central bank’s governing body decided last month to conduct a “comprehensive review” of the institution’s forecasting and other processes.
Ahead of Thursday’s rate decision, Andrew Goodwin, an economist at Oxford Economics, said “markets are saying they have lost confidence in the bank”.
The half-point increase was “an attempt to send a strong signal”, Mr Goodwin said. But now traders expect more interest rate hikes and more “tough talks” until the central bank “gets the inflationary situation under control.” Mr Goodwin estimates the bank will raise rates to 5.75 per cent in the next three months.
In financial markets, traders are betting that interest rates will reach above 6 percent by the end of the year.
Even though the unexpectedly big hike in interest rates did little to ease concerns among investors, it has fueled criticism in other corners.
Mortgage holders are worried about overpayments as more than a million households’ fixed-term agreements expire this year and will need to reset the interest rate on their loans. Economists at the Institute for Fiscal Studies said this week that if mortgage rates remain high, payments for 1.4 million homeowners would increase by at least a fifth of their disposable income.
The government has ruled out providing direct financial support to mortgage holders, but on Friday, Britain’s biggest lender agreed to give people a 12-month grace period if they miss payments before repossession proceedings.
Sharon Graham, head of Unite, one of Britain’s biggest trade unions, said the interest rate hike was the wrong choice and was “causing pain on ordinary families”.
Others agree. “I’m not sure it was the right thing to do,” said Jagjit Chadha, director of the National Institute of Economic and Social Research. He said that policy makers should not do anything now. There is enough momentum to bring down inflation over the next few years compared to previous rate hikes, he said.
Mr Chadha said, the Bank of England needed clear communication that inflation would take a long time to come down – partly due to factors outside its control, such as a tight labor market, one of the consequences of Brexit – but Those its functions will work eventually.
This clear message “could have provided comfort to households and prevented financial markets from betting against the bank, as we have seen over the past week,” Mr Chadha said.