Interest rate hike expectations after UK inflation shock

Interest rates are set to rise again after data shows inflation remains high, inflation, a measure of the rate at which prices rise, was 8.7% in the year to May, the same rate as in April.

Rising prices for airline tickets and used cars have led to this unexpected figure, but food and energy costs have hit household budgets heavily. Interest rates are expected to rise 0.25% to 4.75% on Thursday, but some think they could hit 5%.

The bank is responsible for keeping inflation at 2%, but the current inflation rate is four times that number.
The Bank of England has been raising interest rates steadily since the end of 2021. This makes it more expensive to borrow money and should theoretically encourage people to borrow less and spend less, which means less money. The price increase is expected to subside.

It has raised concerns about lending, especially mortgages, with home owners – a third of adults in the UK – facing a sharp rise in repayments as contracts fixed-term contract ends. First-time buyers also risk being kicked out of the market as lending conditions tighten.

On Wednesday, two-year fixed-rate mortgages averaged 6.15%, while five-year deals were at 5.79%. On Thursday, Prime Minister Jeremy Hunt appeared to favor further rate hikes saying he “will not waver in his determination to support the Bank of England as it seeks to remove inflation from our economy”. .

Labour’s shadow chancellor Rachel Reeves has criticized the Conservative government for failing to “get inflation under control”.

Banks must create a recession

Karen Ward, a member of Mr Hunt’s economic advisory board and chief market strategist at JP Morgan Asset Management, said the Bank needed to “create a recession” to contain soaring prices, arguing that they were “too hesitant” to raise interest rates. . distant.

Ms. Ward said there are signs that wage increases are contributing to higher prices. She said the Bank needed to “create uncertainty and fragility” in the economy to prevent prices from rising too quickly.
“It’s only when companies feel anxious about the future that they think, ‘Well, maybe I can’t stand this price hike,’ or workers, when they’re a little less confident at work, She just thought, ‘Oh, me.’

But Andrew Selley, chief executive of Bidfood UK, a wholesale food supplier, said raising rates was “not the right thing to do”. “It’s suffocating the economy. They have to find other ways to support businesses so they can weather the storm,” he said.

Worry about salary increase

An important number the Bank analyzes when deciding interest rates is called “core” inflation, which excludes direct prices for energy and food, as well as alcohol and tobacco.

7.1% of Core inflation rose in the 12 months to May, from 6.8% in April and is now at its highest level since March 1992.

Grant Fitzner, chief economist at the Office for National Statistics (ONS), which produces data on the UK economy, said the increase was due to service prices at cafes, restaurants and higher hotel.

“That’s probably at least partly due to the pay rise we’ve seen,” he added.

Rising core inflation suggests businesses can pass on growing wage costs to consumers”, said Yael Selfin, chief economist at KPMG UK Wages in the UK have grown at their fastest pace in 20 years, excluding the pandemic, but still lagging behind the pace of inflation.

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *