The Bank of England is poised to increase interest rates for the 14th consecutive time as it continues its efforts to rein in persistently high price increases. Many economists predict that the Bank will announce a rate hike from the current 5% to 5.25% on Thursday at noon.
This move will have implications for borrowers and savers alike. Higher mortgage and loan interest rates are expected, but savers can also anticipate higher returns on their deposits.
Rising inflation in the UK has placed significant strain on households. The cost of living continues to rise, exerting pressure on individuals and families.
Notably, the last time interest rates reached 5.25% was back in April 2008, approximately 15 years ago. However, this increase would be less substantial than July’s dramatic jump from 4.5% to 5%, coinciding with signs of a moderation in price hikes.
In June, inflation fell by a larger-than-anticipated margin, currently resting at 7.9%, which represents the lowest level in over a year. Nevertheless, it remains nearly four times higher than the Bank of England’s target of 2%.
Pantheon Macroeconomics suggests that policymakers may not need to raise interest rates as much as initially anticipated due to these developments.
By making borrowing more expensive, the Bank aims to curtail spending, leading households to reduce their consumption and thereby alleviate price pressures.
However, there exists a delicate balance in this endeavor. Aggressively raising rates could risk a slump in the economy, while refraining from doing so could exacerbate inflationary pressures even further.
Implications for Individuals
The Institute of Economic Affairs (IEA), a free-market think tank, argues that the Bank should allow previous rate hikes to take effect before implementing further increases.
Trevor Williams, a member of the IEA and former chief economist at Lloyds Bank, cautions against unnecessary rate hikes that may potentially harm the economy without expediting the reduction in inflation. Williams believes that the UK economy teeters on the brink of a more pronounced slowdown.
Bank of England Governor Andrew Bailey has previously refuted claims that the institution intentionally seeks to trigger a recession as a means of tackling surging prices. At the previous interest rate decision, he acknowledged concerns among mortgage and loan holders but emphasized the necessity of addressing high inflation.
Early indications suggest that higher interest rates are already impacting the UK economy. Nationwide reports the fastest annual decline in house prices in 14 years during July.
Prime Minister Rishi Sunak, speaking on LBC radio, expressed his desire for inflation to decrease more rapidly while assuring the public that there is hope on the horizon.
