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Bank Of England Raises Its Key Interest Rate To A New 15-Year High To Fight Inflation

Campaigners from Positive Money demonstrate outside the Bank of England in London, Thursday, Aug. 3, 2023, against the rises in interest rates amid the cost of living crisis. The Bank of England is set to raise interest rates for the 14th time in a row to a fresh 15-year high and keep the door open for further increases as it tries to tamp down persistently high inflation. (Jordan Pettitt/PA via AP)

LONDON (AP) — The Bank of England raised its main interest rate Thursday to a fresh 15-year high as it tries to bring down persistently high inflation, poised to bring more pain to people who are seeing rents and mortgages rise during a cost-of-living crisis.

The quarter-percentage point increase to 5.25%, which was widely anticipated by economists, was the central bank’s 14th hike in a row. The bank saidsome of the risks from more stubborn inflation, notably higher wages, had “begun to crystallise,” leading it to push borrowing costs higher.

There had been fears, certainly among hard-pressed households and businesses, that the bank would repeat its outsized half-point increase from June. But figures last month showing that inflation fell more than anticipated to 7.9% eased the pressure to act as aggressively again.

“Inflation is falling and that’s good news,” Bank Gov. Andrew Bailey said. “We know that inflation hits the least well off the hardest, and we need to make absolutely sure that it falls all the way back to the 2% target.”

With inflation four times that level, the bank is expected to hike again over the coming months, and it indicated Thursday that rates would need to stay higher for longer.

The U.S. Federal Reserve and the European Central Bank also raised rates last week, but they are thought to be nearer to taking a pause because inflation has come down more sharply than in the U.K. Price spikes have eased to 3% in the United States and 5.3% across the 20 countries that use the euro currency.

Central banks around the world have been raising borrowing costs to combat inflation unleashed by higher energy prices after Russia invaded Ukraine and supply chain backups as the global economy recovered from the coronavirus pandemic.

Higher interest rates help dampen inflation — but also economic growth — by making it more expensive for consumers and businesses to borrow to buy homes, cars or equipment.

Several reasons point to the U.K.’s higher inflation. Many economists blame Britain’s departure from the European Union, as Brexit impeded trade and raised costs for businesses. Others put more of the blame on the Bank of England itself — for being too slow in starting to raise interest rates, thereby allowing inflation to root itself more widely in the economy, most notably in higher wages.

Whatever the balance of blame, it’s been a particularly painful time for U.K. households whose mortgage rates or rents have skyrocketed while they struggle to make ends meet during a cost-of-living crisis marked by higher costs for food and energy.

In forecasts accompanying the decision, the central bank said inflation is expected to drop to 4.9% by the end of the year, with food price rises set to moderate.

But for many, the pain has yet to hit. Unlike in the U.S., most homeowners in Britain lock in mortgage rates for only a few years, so those whose deals expire soon face the prospect of much higher borrowing costs.

Around 2.5 million such deals are due to expire by the end of next year, with around a million households facing a 500-pound ($640) monthly increase in their mortgage repayments by 2026, Bailey said.

“As a result, pass-through of the recent interest rate rises to outstanding mortgages has been limited so far,” said Michael Saunders, senior economic adviser at Oxford Economics and a former rate-setter at the Bank of England.

On Thursday, two of the nine members of the rate-setting Monetary Policy Committee voted for a half-point increase, while six backed the quarter-point rise and one opted to keep rates unchanged.

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Copyright 2021 Associated Press. All rights reserved.

Source: https://hosted.ap.org/article/4bb63cad5f2287d9cc005af12ac281a0/bank-england-raises-its-key-interest-rate-new-15-year-high

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