The Bank of England raised interest rates by half a percentage point on Thursday, a bigger move than expected, as policymakers struggle to ease Britain’s persistently high inflation rate.
The central bank’s rate-setting committee raised rates for the 13th consecutive time to 5 percent, the highest since early 2008. monthly payments while millions of families are already struggling to pay high energy and food bills.
The bank’s decision came a day after the latest inflation data underscored the bank’s challenge: Consumer prices rose 8.7 percent in May from a year earlier, instead of falling as economists had predicted, the same as the previous month.
The Bank of England’s decision stands in stark contrast to some of its international counterparts. Last week, the Federal Reserve decided to hold interest rates steady in the 5 to 5.25 percent range, and the European Central Bank raised rates by a quarter point.
“The economy is doing better than expected, but inflation is still very high and we have to tackle it,” Bank of England Governor Andrew Bailey said in a statement on Thursday. “We know this is tough – many people with mortgages or loans will be worried about what this means for them. But if we don’t raise rates now it could get worse later.’
Despite the Bank of England’s efforts so far, evidence is accumulating that the crackdown on inflation will be harder than previously expected. Last week’s data showed wages in Britain rose faster than expected, inflation in the services sector accelerated and food inflation was still near its highest level in more than 45 years.
The minutes of the committee meeting said the scale of the surprise in the data, particularly wage growth and services inflation, necessitated a half-point rate hike.
“Against the backdrop of a tightening labor market and continued resilience in demand, the data indicated greater persistence in the inflation process,” the minutes said.
The Bank of England rate hike could end a period of recent rate-hikes by both the Fed and the European Central Bank. After Fed officials paused after 10 consecutive hikes and eurozone policymakers raised rates for an eighth straight time last week, analysts forecast only one or two more increases.
The British Central Bank has tightened monetary policy dramatically over the past year and a half, raising interest rates to near zero from December 2021 to rein in the economy. But as British inflation data continues to surprise policy makers and other economists, traders are betting that the Bank will have to raise interest rates further to bring inflation down to its 2 percent target. Before the policy decision was announced, traders were betting that interest rates would reach 6 percent by early next year.
Persistent price pressures in the UK are causing turmoil in the mortgage market, as they raise expectations that the Bank will need to raise rates further. Traders, betting that the Bank of England will continue to raise rates, have pushed up yields on government bonds. As mortgage offers reflect those higher interest rates, homeowners are concerned about the jump in their monthly payments. Recently, some lenders pulled mortgage deals in response to rapid changes in the market.
On Thursday, the central bank said it was closely monitoring the impact of its “significant” increase in interest rates, noting that because more people have fixed terms on their mortgages, the full impact of higher interest rates will be “somewhat Will not be felt for” time.”
The Bank of England said last month that around 1.3 million households are expected to reach the end of their fixed rate term by the end of the year, leading to a reset in the rate applicable to their loans. The average mortgage holder in that group would see their monthly interest payment rise by around £200 ($255) a month, or £2,400 over the course of a year, if their mortgage rate rises by the 3 percentage points that previous mortgage quotes suggest. Months have been given, said the bank.
Since then, rates have gone up even more. Late last week, the average rate for a two-year fixed-rate mortgage approached 6 percent for the first time this year.
The additional financial burden on mortgage payers has compounded a stubborn cost-of-living crisis, as inflation has outpaced wages for the past year and a half. According to a survey by the Office for National Statistics, almost two-thirds of adults in Britain said their cost of living had increased in June compared to a month earlier, and nearly all of them said it was due to grocery shopping. This was due to the high cost. ,
Two members of the nine-person committee, Swati Dhingra and Silvana Teneiro, voted to keep interest rates steady at 4.5 percent, arguing that the effects of the previous rate hike were still working their way through the economy, and So the bank was at risk of tightening policy more than necessary. He also said that there were forward-looking indicators that suggested that inflation and wage growth would decline significantly.
But they were all outnumbered by the other seven members, who chose a half-point increase, concerned that the effects on domestic prices and wages from external shocks, such as the war in Ukraine, would take longer to fade than emerge. He predicted that lower wholesale energy prices would pull down the headline rate of inflation later in the year, but that services inflation, which reflects pressure from domestic prices, would remain “broadly unchanged” in the short term.
As prices in Britain continue to rise faster than expected, and faster than in the United States and Western Europe, the Bank of England has come under increasing scrutiny. Last month, the central bank’s governing body decided to conduct a “comprehensive review” of the institution’s “forecasting and related processes in times of significant uncertainty”.