Economic danger zone: Bank of England hikes interest rates following inflation failure

Figures released by the Office of National Statistics (ONS) yesterday revealed inflation rates have remained at 8.7%, causing major concern amongst mortgage holders and business owners.

After sifting through three Prime Ministers in the past four years you would think one of them would be able to help get England back on its feet. However, after Boris Johnson ran the country into the ground with the ways in which he chose to deal with Covid-19 and Liz Truss’ government plummeting the country into mass amounts of debt, Rishi Sunak pledged to halve inflation rates when he came into power towards the end of last year.

Despite Mr Sunak’s promise, his government seems to be following in the footsteps of his former assessors as the recent inflation figures – released yesterday by the ONS – display rates have remained at the same level they were four months prior.

The news came as city economists had previously remained optimistic and forecast that rates would fall to 8.4%.

‘Core’ inflation, which impacts upon energy and food costs, is at the highest rate since 1992, as UK debt is being flagged as higher than annual GDP for the first time since 1961.

Diving into why inflation rates have remained so high, the ONS have highlighted that the prices for air travel as well as recreational and cultural goods contributed, while falling prices for petrol provided the most help towards the downward trend.

Rising prices for second-hand cars, live music events and video games also contributed to inflation remaining high.

Financial markets reacted to the figures by betting that the Bank would increase rates today by at least a quarter-point from the current level of 4.5% with a 50/50 chance of a tougher hike of half a percentage point to 5%.

The central bank has already pushed through 12 consecutive rate hikes since December 2021, when borrowing costs had been set at a record low of 0.1% to support the economy through the Covid-19 pandemic.

Commenting on the latest inflation figures, Charles White Thomson, CEO at Saxo UK, said: ‘The UK inflation print is highly disappointing and is another heavy blow for the beleaguered UK consumer. 

 ‘The UK is in an economic danger zone and worryingly it also shows that we and the Bank of England are continuing to lose the war to bring down or dominate enemy number one – inflation.’

‘Inflation is an elusive, wily and powerful foe especially when it builds up momentum, as it is now,’ Charles said. ‘This is a strong argument for 50-basis point hike at [today’s] Bank of England meeting. The Bank needs to take initiative quickly. The risk for further policy failure is real and the stakes are getting increasingly high.’

Experts, however, were right to speculate, as the Bank of England has confirmed today that interest rates will be rising to 5% – the highest in 15 years. Homeowners are facing a massive increase in mortgage repayments, with the average two-year fixed rate deal hitting 6.19%.

Alex Livingstone, Head of Trading & FX at Titan Asset Management, said: ‘The Bank of England surprised market expectations today raising rates by 0.5% today (versus a consensus of a 0.25% hike) taking interest rates to 5%.

‘This decision comes off the back of a resilient unchanged inflation print yesterday, with core inflation rising to 7.1%.

‘However, with terminal rates now being priced at over 6% the question at the front of investors’ minds will now be to question the impact of this latest hike on the housing market and subsequent UK economic growth.’

Against this backdrop, the government is now under growing pressure to intervene to help millions of households facing a ‘ticking timebomb’ of higher mortgage payments before the general election.

Figures from the data provider Moneyfacts showed that the average interest rate on a two-year fixed residential mortgage rose to 6.15% on Wednesday, the highest level since Liz Truss’s disastrous mini-budget last autumn.

Underscoring the financial pain for millions of households, the Institute for Fiscal Studies thinktank warned that almost 1.4m mortgage holders would see 20% of their disposable income erased by the surge in borrowing costs.  

Douglas Grant, Group CEO at Manx Financial Group PLC, said: ‘The latest inflation figures remain stubbornly high, going against the Bank of England’s reassurances that 2023 will see inflation fall quickly.

‘Interest rate hikes and ongoing rising costs continue to bring challenges that businesses are struggling to outmanoeuvre.

‘Indeed, coupled with the global banking sector showing signs of weakness, SMEs [ an organisation that has fewer than 250 employees] must take this as a reminder to review their existing lending structures and ensure they can keep ahead of the storm.’

Images: K. Mitch Hodge and Nick Pampoukidis