In an effort to combat price increases, the Bank of England is expected to raise interest rates for the thirteenth time in a row later.
According to official data released on Wednesday, inflation—the annual rate at which prices rise—remained at 8.7% in May, increasing the likelihood that the Bank will raise its benchmark rate from 4.5 percent.
Despite debate regarding its efficacy, interest rates continue to be its primary tool for lowering inflation.
Analysts predict a rise to 4.75 percent, but a larger rise to 5 percent is still possible.
Some homeowners would suffer further from such a change, but savers might gain from it.
Due to the rising cost of living, the Bank Rate has been consistently rising since December 2021, reaching its highest level in about 15 years.
The idea is that raising interest rates makes borrowing money more expensive, which means people have less money to spend. This reduces demand, which in turn slows price increases.
After a meeting of the Bank’s Monetary Policy Committee, which makes the decision independently of the government, at 12:00 BST on Thursday, a further rise is anticipated to be confirmed.
Prime Minister Rishi Sunak will reaffirm his commitment to halving inflation by the end of the year in a speech that he will deliver shortly after the decision is made. In the speech, he will say that he has a “deep moral responsibility to make sure the money you earn holds its value.”
He is expected to declare that he is “completely confident that if we hold our nerve” the target can be accomplished at a business event in south east England.
Rachel Reeves, the shadow chancellor for Labour, has criticized the government regarding the effects of rising interest rates on mortgage holders.
She stated: “Ahead of the rate decision The Conservatives ought to take responsibility and act right away, not arguing about peerages and parties or ruling out mortgages.
The Office for National Statistics reported on Wednesday that inflation remained at 8.7%, which was the same as the previous month. Analysts, who had anticipated that it would fall, were taken aback by that.
The shocking figure was brought about by higher prices for used cars and flights, but supermarket food prices also continued to rise quickly.
The so-called “core” inflation, which excludes volatile factors like direct food and energy costs, as well as the costs of alcohol and tobacco, continued to rise last month at the fastest rate in 31 years.
According to economists, this distinguished the UK from other countries with falling inflation, such as the United States and Germany.
With the declaration that it would not “hesitate in our resolve to support the Bank of England as it seeks to squeeze inflation out of our economy,” Chancellor Jeremy Hunt appeared to support additional interest rate increases.
By the end of the year, the government wants to cut inflation in half to 5%. The official, long-term goal that the Bank has set is 2%.
Charles Stanley investment manager Rob Morgan stated: The Bank of England is having a hard time putting the inflation genie back in its bottle.
“The Bank has no choice but to continue on a path of raising interest rates several times,” the statement reads. “With price momentum continually running above expectations and strong wage data.”
The “mortgage bomb”
A wide range of loans may become more expensive as interest rates rise. With tracker and variable rate mortgages, more than 1.4 million people typically see an immediate increase in their monthly payments.
Those with a typical tracker mortgage would pay approximately £24 more per month if the Bank of England raised its rate from 4.5 percent to 4.75 percent. There would be a $15 increase for those with standard variable rate mortgages.
This is on top of the rises that have occurred since the previous rate rises. Average tracker mortgage holders would pay approximately £441 more per month and variable rate mortgage holders would pay approximately £282 more per month before December 2021.
A typical tracker mortgage holder would pay approximately £47 more per month if the rate increased to 5%. There would be a $30 increase for those with standard variable rate mortgages.
A fixed-rate mortgage is in effect for eight out of ten mortgage holders. Although the amount they pay each month may not immediately change, when they move on to a new deal, homebuyers and those looking to remortgage face a significant increase in their monthly payments.
The so-called “mortgage bomb” is now a significant political and economic issue. In November 2021, the average two-year fixed deal was 2.29 percent, which is now above 6 percent.
The Foundation for Financial Investigations (Uncertainties), a politically free financial matters centered think tank, says increasing loan fees could mean 1.4 million home loan holders see their dispensable wages fall by over 20%.
The effect is also being felt by renters. According to the IFS, “it is likely that at least part of the increases in rents that we are seeing is due to high interest rates hitting the borrowing costs of landlords.”
Exclusive data provided to the BBC by property portal Zoopla shows that rents in the UK have been rising faster than wages for nearly two years.
Meanwhile, a rise in interest rates should be beneficial to savers; however, MPs on the Treasury Committee have criticized banks and building societies for not fully compensating devoted savers with instant-access savings accounts.