The Bank of England boss refutes accusations of intentionally causing an economic downturn as interest rates are raised beyond expectations, reaching the highest level in 15 years at 5% from the previous 4.5%.
The increase in interest rates will result in higher loan repayments for borrowers and mortgage holders, but it is expected to be advantageous for savers. Bank governor Andrew Bailey justified the decision, stating that failing to raise rates now could potentially lead to more adverse consequences in the future.
In reference to the surprising interest rate decision, he acknowledged, “I understand the difficulty and the pain that causes for many people.”
Meanwhile, Karen Ward, a member of Chancellor Jeremy Hunt’s economic advisory council, criticized the Bank for being overly cautious in its interest rate increases and suggested intentionally inducing a recession to address the issue of escalating prices.
During her interview with the BBC, she highlighted that when companies become “nervous” due to elevated interest rates, they are less likely to raise prices. Additionally, employees are less likely to demand higher wages, which also contributes to inflationary pressures.
Nevertheless, Mr. Bailey clarified that the Bank’s intention was not to intentionally trigger a recession. He acknowledged the concerns of individuals with mortgages or loans, stating that while understandable, the decision was driven by the necessity to address persistently high inflation levels.
He further stated that in order to bring down inflation, wage increases cannot continue at their current pace. Over the past year and a half, mortgage rates have surged in response to rising interest rates:
The average two-year fixed residential mortgage now sits at 6.19%, whereas the five-year rate stands at 5.82%. In comparison, these rates were closer to 3% in June of the previous year.
For those with a typical tracker mortgage, monthly payments will increase by approximately £47. Meanwhile, individuals with standard variable rate (SVR) mortgages can expect a £30 increase.
Since December 2021, this translates to a monthly repayment surge of £465 for tracker mortgages and £297 for SVR mortgages.
Additionally, borrowing costs are expected to increase. Presently, the average annual interest rate on bank overdrafts stands at 21.86%, while credit cards carry an average interest rate of 20.13%.
In a bold maneuver, the Bank aims to assert its control over inflation, which exceeded expectations in May and surpassed levels observed in other nations. This dramatic action is taken to address the rising annual rate at which prices escalate.
Source : bbc.com