Interest rates may rise dramatically if UK inflation stops falling


That’s right. UK inflation unexpectedly stayed at 8.7% in May, defying forecasts for a slowdown to 8.4%. This is bad news for UK Prime Minister Rishi Sunak, who has promised to halve inflation this year, and economically for millions of people across Britain struggling with a cost-of-living crisis.

There is an expectation that the Bank of England will raise interest rates by 0.25 percentage points during its upcoming meeting on June 22nd, resulting in a Bank Rate of 1.25%. This would be the fifth consecutive interest rate increase, bringing the Bank Rate to its highest since 2009.

However, even if the Bank of England raises interest rates aggressively, it needs to be clarified that this will be enough to bring inflation down to a more sustainable level. The main drivers of inflation, such as energy prices and the war in Ukraine, are beyond the control of the Bank of England.

As a result, inflation may remain high for some time, putting further pressure on household budgets and the UK economy.

Here are some of the factors that are contributing to high inflation in the UK:

  • The war in Ukraine has caused energy prices to surge.
  •  The UK economy is recovering from the COVID-19 pandemic, which puts upward pressure on prices.
  •  Wages are rising, which is also contributing to inflation.

The Bank of England hopes that raising interest rates will slow the demand for goods and services, which will help bring inflation down. However, whether this will be enough to offset the other factors driving inflation higher is still being determined.

As a result, inflation may remain high for some time, putting further pressure on household budgets and the UK economy.

Here are some of the potential consequences of high inflation in the UK:

  • Households will have less money to spend on other things, such as food, clothing, and entertainment.
  •  Businesses may have to raise prices, which could decrease demand for their products or services.
  •  The UK economy could slow down, which could lead to job losses.

It is important to note that these are just some potential consequences of high inflation. The impact of high inflation will depend on several factors, including the length of time inflation remains high and the extent to which the Bank of England can bring it down.

In addition to raising interest rates, the government could take other steps to help reduce inflation, such as providing financial assistance to low-income households or lowering taxes. However, these measures would also have economic consequences, and it is unclear how effective they would be in reducing inflation.

Overall, the situation with inflation in the UK is complex and uncertain. Inflation may come down on its own, but it is also possible that it will remain high for some time. The government and the Bank of England will need to take careful action to manage the situation and minimize the impact of inflation on the UK economy.

This marks the United Kingdom out from other advanced economies, including the United States and the 20 countries that use the euro, where core inflation has started to ease, noted Neil Shearing, chief economist at Capital Economics.

“Inflation appears to have infected the labour market and wage-setting to a greater extent in the UK than elsewhere,” he said, adding that the Bank of England was now more likely to raise borrowing costs by half a percentage point Thursday, rather than a quarter point as had been expected.

According to UK Finance, an association of banks and financial service providers, 800,000 fixed-rate mortgages are due to expire in the second half of this year, raising the spectre of an unaffordable jump in payments when borrowers refinance.

“People are very concerned with what has been described as the mortgage bomb about to go off,” UK lawmaker Jake Berry said Tuesday in parliament.

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Marta Lopez

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