By Ode Idoko, London, UK.
Following the soaring inflation in the UK, the Bank of England has raised the interest rates by 25% from 1% to 1.25%. This makes it the fifth consecutive rise, pushing the country to the highest level in 13 years. This comes on the heels of rising cost of living, driven by record fuel and energy prices.
Following the war between Russia and Ukraine, living costs such as energy, food, housing and transportation have risen astronomically in the last one month and they are expected to rise further as summer approaches. Inflation in the UK is currently at a 40-year high at 9%, and the Bank warned it could surpass 11% before 2022 runs out.
The Bank said rising energy prices were expected to drive living costs even higher in October, but added it would “act forcefully” if necessary, should inflation pressures persist. Capital Economics speculates that the Bank could eventually have to raise interest rates to 3%.
One way to try to control rising prices – or inflation – is to raise interest rates. This increases the cost of borrowing and encourages people to borrow and spend less. Higher interest rates also motivate people to save more.
The June rate rise means that homeowners with a typical tracker mortgage will have to pay about £25 more a month. Those on standard variable rate mortgages will see a £16 increase.
Compared with pre-December 2021 – when the Bank announced the first in this series of rate rises – tracker mortgage customers are paying around £115 more a month, and variable mortgage holders about £73 more.
However, about three-quarters of mortgage-holders have a fixed-rate deal, so have not been affected immediately.
Meanwhile, some business owners are of the view that rising borrowing costs may curb customer spending. “At the moment we’re not seeing it directly but we know we are a luxury,” Julie Dalton, managing director of Gulliver’s Theme Park Resorts noted. “Past experience has told us when interest rates go up, we do start to suffer.”
Six of the nine members of the Bank’s Monetary Policy Committee voted to raise rates to 1.25%, but three backed a bigger increase to 1.5%.
Minutes from the Bank’s meeting also reveal that it expects the UK economy will shrink by 0.3% in the April-to-June period.
