Bank of England Set to Continue Raising Rates While Inflation Remains Stubborn

Expectations are for the bank to keep up with its peers and lift rates again for the twelfth consecutive meeting. This time potentially for a 25 basis points bump to the bank rate from 4.25% to 4.5%.

Goldman Sachs recently predicted that the BoE’s interest rate tightening cycle will peak at 5% by August. After which point inflation is expected to fall rapidly as the cost of energy is thought to be cooling globally.

The Reserve Bank of Australia, the European Central Bank and the Federal Reserve all recently continued on their own paths of tightening policy this month too, however, the rate of inflation in the UK seems to have been more resistant to higher borrowing costs than some of these other major economies.

Why does this seem to be the case? We’ll take a look below and cover some of the factors that have impacted prices in the country the past and what could happen for the rest of this year in the UK.

Inflation Around the World

High inflation has been biting into the purchasing power of citizens across the developed world for over the past two years now.

It’s been linked to a variety of factors, including economic upheaval caused by the pandemic, issues with supply chains, the fiscal and monetary stimulus offered in reaction to the pandemic by governments and central banks, and price gouging.

An unanticipated rebound in demand through 2021 eventually resulted in record and widespread supply bottlenecks across almost every industry which occurred alongside rising consumer demand.

The US’s most recently recorded inflation rate for April dipped to 4.9% after its high of 9.1% in June of last year. 10 rate hikes for a total of 500 basis points worth of increases has been required to curb consumer demand and have any impact on cooling the tight conditions in the labor market so far. The Fed hinted at pausing rate hikes after its last meeting, but no decision was apparently made and the target rate of 2% is still a ways off.

The EU’s inflation rate was down to 6.9% in March but preliminary data for April suggests it may have risen back to 7%. It’s a vast difference from the high of 10.6% seen last October but still a long way from the ECB target range around 2%. 7 rate hikes and 375 basis points worth of tightening policy have been employed among other measures to get to this point. However, some countries are still individually battling extremely high rates and the ECB President Christine Lagarde in her press conference following the decision to raise rates a further 25 basis points this month, conceded that there was still a lot of work to be done.

In Australia, inflation is back down to 7% after an almost 30 year high of 7.8%, 11 rate hikes and 375 basis points of increases have slowed price rises and started to turn things around. The RBA has started reducing the severity of its tightening regime in recent months too. A welcome pause in April was followed by a small 25 basis point increase in May. Given the popularity of variable rate mortgages set over short time frames in Australia, many who bought homes during the pandemic will be facing high increases to their interest payments very soon, and inflation is expected to slow over the latter half of this year as a result.

Meanwhile, the UK still puts inflation at 10.1% from the peak of 11.1% in October last year. After 12 rate hikes and a total of 400 basis points of increases, the cost of living is still out of control. The unfortunate fact that the UK is the only significant advanced economy to still experience double-digit inflation is only one sign of the major economic difficulties the nation is experiencing at present.

Sickness Affects Labor Market, Energy Costs Easing

The poor energy efficiency of the UK’s existing housing stock and the country’s heavy reliance on gas for power generation and residential heating has contributed to the energy market’s high inflation rate in recent times. However, with the Energy Price Gaurantee’s recent extension to the end of June and the expectation that prices will cool for gas this year, this will hopefully soon ease matters.

Cornwall Insight, an energy consultant, estimates that by the end of the year, the median family would spend about £2,200 on energy, down from the current £4,279, thanks to lower prices and government rebates.

In the labor market, long-term illness has become a major factor in the decision of over 2.5 million economically inactive persons not to actively seek employment, and this figure is apparently rapidly increasing.

The number of individuals who are unable to work due to illness has increased by over 150,000 in the last year, and by 89,000 in the three months leading up to February, according to data from the Office for National Statistics.

The increased trend is important for the economy as a whole, since, despite a decline in overall inactivity due to more young people entering the workforce, there are still over a million unfilled positions.

The Impact of Variable Mortgages

According to the UK’s Office for National Statistics, when it comes time to renew their fixed-rate mortgages in 2023, more than 1.4 million homeowners in the UK will be confronted with the possibility of an increase in their interest rates.

The majority of fixed-rate mortgages in the UK (57%) will be up for renewal in 2023, and the bulk of these mortgages have interest rates that are below 2%.

Although interest rates have been on the rise since the beginning of 2022, the vast majority of borrowers who have a fixed rate are still protected since they are locked in at a rate below 2%. Those on a variable rate, depending on the amount borrowed and the time period, will be looking at hundreds of pounds a month extra to pay on their home loans.

This lag in policy effects, coupled with lower energy costs, leaves some forecasters to believe inflation should begin to fall in 2023, and Chancellor of the Exchequer Jeremy Hunt may still hope to achieve his goal of halving the rate of price increases by the end of the year.

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