Will interest rates come down again?

The Bank of England has increased its base interest rate from 4.5% to 5% in a bid to tame inflation. It is the 13th hike in row and the highest the rate has been for 15 years. 

Expectations had been for a rise of a quarter of a percentage point, to 4.75%. But yesterday the Office for National Statistics announced that the Consumer Price Index (CPI) measure of inflation remained at 8.7% in the year to May, the same as April and higher than most experts had predicted. 

Food and energy prices have been blamed as “a key driver of inflation”, said ITV News. Interest rates dictate the cost of borrowing, so the pause in the recent fall in inflation is likely to lead to “soaring mortgage repayment rates” for homeowners. 

The government has promised to halve inflation this year, with Chancellor Jeremy Hunt even suggesting he would be comfortable with a recession if it would bring down price rises. 

In its November Monetary Policy Report, the Bank said: “Raising interest rates is the best way we have to bring inflation down.”

What did the papers say?

An interest rate rise by the Bank of England (BoE) was “a nailed-on certainty”, said Sky News, but it was “widely tipped” to be only to 4.75%.

The latest inflation data “came as a shock”, said Sky News, as most experts thought it would continue to decrease. It showed that price growth was becoming “more engrained in the economy” and “prompted financial market participants to anticipate a greater, almost even, chance of a half a percentage point hike to 5%”.

These figures “were not just objectively bad”, said Chris Giles, economics editor of the Financial Times. “They also come at a supremely sensitive time.” The Bank “had not expected a significant rise in such underlying measures of inflation”, and it thought the “headline rate” would drop to 8.3% in May. 

Interest rate rises might be the Bank’s “only tool” to try to bring down inflation, but they mean “more pain for borrowers”. 

Average rates for two-year fixed mortgage deals have risen above 6%. “Even more troubling” for the Bank, said the FT, are signs that wages and prices are rising “in tandem”, which makes inflation much harder to tackle. 

The Bank argues that the pace of wage rises contributes to demand and intensifies inflation. Annual wage growth is currently at about 7.2%.

The “core function” of the Bank’s Monetary Policy Committee (MPC) is to keep inflation at a target rate of 2%, said Sky News.

The governor of the Bank, Andrew Bailey, is under fire “from a Cabinet minister and a host of City analysts after a red-hot inflation print spooked the Square Mile”, said City A.M. 

Bailey and the Bank have “demonstrably failed” in their remit to maintain stable inflation, Neil Wilson, chief markets analyst at Markets.com, told the paper. 

The “massive headache in the mortgage sector” should not have prevented “a more rapid effort to tighten”.

Hunt’s economic advisers have “turned on the Bank of England” and accused it of “exacerbating the mortgage crisis facing homeowners”, said The Times.

“The Bank has tried to be too cute,” said Sushil Wadhwani, a former external member of the MPC and a member of the chancellor’s economic advisory council, “and on frequent occasions when they have raised rates, they have undone the benefits by talking doveishly.”

What next? 

Wage growth pressures may ease, according to Samuel Tombs, chief UK economist at Pantheon Macroeconomics, and energy-linked inflation could drop. 

“The headline rate of CPI inflation still looks set to fall sharply over the remainder of this year,” he told Sky News, “probably to about 4.5% in December and to around 2% in the second half of 2024.”

The Bank noted last year that it expects inflation to then “fall sharply from the middle of next year” as “the price of energy is not expected to rise so rapidly”.

But with productivity “growing at best at 1 per cent a year”, said the FT, wage growth would need to drop from its current level – about 7.2% – to about 3%, “before the BoE feels comfortable with persistent inflationary pressures”.

Financial markets predict that interest rates will climb to 6% by the end of the year, which would mean a further increase in mortgage rates. For mortgage holders coming to the end of fixed-rate deals there is what politicians are calling a “ticking time bomb” as borrowers face steep increases in monthly repayments.

Economists at the International Monetary Fund (IMF) previously predicted that interest rate rises were “likely to be temporary” and that they would return “towards pre-pandemic levels” across advanced economies.

But so far the evidence suggests the Bank of England has done “too little too late to control inflation”, said the FT. “That means it has a more difficult inflation problem to resolve than it and most analysts previously thought.”


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