London, Aug 3: The Bank of England is set to raise interest rates Thursday for the 14th time in a row to a fresh 15-year high and keep the door open for further increases in the months to come as it tries to tamp down persistently high inflation.
Most economists think the UK central bank will increase its benchmark rate by a quarter of a percentage point, to 5.25 per cent.
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 per cent eased the pressure to act as aggressively again.
“With inflation still four times the 2 per cent target, the Bank of England has little choice but to raise the bank rate again and leave the door open to further hikes in upcoming meetings,” said Kallum Pickering, senior economist at Berenberg Bank.
Though the US Federal Reserve and the European Central Bank raised rates last week, they are thought to be nearer to taking a pause because inflation has come down more sharply than in the UK Price spikes have eased to 3 per cent in the United States and 5.3 per cent 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 UK’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 UK households whose mortgage rates or rents have skyrocketed while they struggle to make ends meet during a cost-of-living crisis.
For many, the pain has yet to hit. Unlike in the US, 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 (USD 640) monthly increase in their mortgage repayments by 2026, according to Bank of England Gov. Andrew Bailey.
“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. (AP)
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