Interest rates to increase for the 13th consecutive time

The Bank of England is set to raise interest rates for the 13th consecutive time in an effort to address the persistent increase in prices. Recent official data revealed that inflation remained at 8.7% in May.

The probability of the Bank announcing an increase in its benchmark rate from the current 4.5% has heightened due to the prevailing circumstances. Although the effectiveness of interest rates as a primary tool to curb inflation has been a subject of debate, they still remain the Bank’s preferred approach.

According to analysts, the most probable increase would raise the benchmark rate to 4.75%. However, there is also a possibility of a larger increase to 5%, although some economists caution that such a significant rise could indicate a loss of control over inflation by the Bank.

While this change would result in added financial burden for certain homeowners, it could bring benefits to savers.

The Bank rate has reached its highest point in approximately 15 years, steadily increasing since December 2021 in response to the significant rise in the cost of living.

Raising interest rates is believed to increase the cost of borrowing, leading to reduced consumer spending and subsequently lowering demand. This mechanism aims to alleviate price increases by addressing and curbing demand.

An additional increase is anticipated to be announced at 12:00 BST on Thursday following a meeting of the Bank’s independent Monetary Policy Committee, responsible for making the decision autonomously from the government.

During an interview on the BBC’s Today programme, Sir Charlie Bean, former deputy governor of the Bank of England for monetary policy, expressed that if he were a member of the committee, he would “likely” vote in favor of a 0.5% increase.

“The developments since the previous meeting have unequivocally demonstrated negative trends concerning inflation,” he commented. “With two unfavorable inflation releases and unexpected robustness in wage growth as indicated by the labor market report, when considering all these factors together, it becomes evident that further rate increases are warranted.”

According to Sir Charlie, the crucial decision for the Bank revolves around whether to take a “substantial step today or a more modest one, while hinting at potential future rate increases.”

Luke Hickmore, investment director at Abrdn, cautioned that there was a significant likelihood of a 0.5% increase. However, he also expressed concern that such a move might convey an unfavorable message to the markets, implying that the Bank has completely lost control over inflation.

Following the announcement, Prime Minister Rishi Sunak is scheduled to deliver a speech reaffirming his commitment to halve inflation by year-end. He will emphasize his strong sense of moral duty in ensuring that the hard-earned money of individuals retains its value.

During a business event in southeast England, it is anticipated that the Prime Minister will express his unwavering confidence in achieving the target, stating that it can be accomplished if determination is maintained.

Labour’s shadow chancellor, Rachel Reeves, has voiced criticism against the government regarding the repercussions of rising rates on individuals with mortgages.

Prior to the rate decision, Rachel Reeves stated, “Rather than engaging in disputes over peerages and parties while dismissing any action on mortgages, the Tories should assume responsibility and take immediate action.”

Analysts were taken aback on Wednesday when the Office for National Statistics revealed that inflation remained unchanged from the previous month, standing at 8.7%. This outcome came as a surprise as experts had anticipated a decrease in inflation.

Analysts were surprised on Wednesday as the Office for National Statistics reported that inflation remained steady at 8.7% compared to the previous month, contrary to their expectations of a decline.

Inflation excluding volatile factors like energy, food, alcohol, and tobacco prices, known as “core” inflation, experienced its highest growth rate in 31 years last month. Economists noted that this distinguished the UK from other countries, including the US and Germany, where inflation is declining.



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By Ryan

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