“Millions of people are in dire straits with mortgages.” “Rising interest rates nightmare.” These were two of the grim headlines. side of britain It took aim at the Bank of England on Friday, the day after it announced a surprisingly large rate hike.
With inflation still high, the country’s central bank officials took a stronger-than-expected step on Thursday, raising interest rates by half a percentage point to 5%, the highest level in 15 years.
“We know this is going to be difficult,” central bank governor Andrew Bailey said, acknowledging that people with mortgages and other loans would be concerned about the fiscal implications of the change. rice field. “But if we don’t raise rates now, it could get worse later,” he added.
The central bank has already raised interest rates 12 times since December 2021, but UK inflation remains at 8.7% in May, unchanged from the previous month. This is more than double that of the United States and markedly higher than inflation in the UK’s Western European neighbors.
pressure is rising He asked Bailey to explain why things seemed to be getting worse in the UK and to prove banks were dealing with inflation. London newspaper The Times derided “excuse, excuse” in an editorial this week, claiming Bailey’s “alibi is fading”.
Bailey’s job is unlikely to be in jeopardy, despite growing criticism of the bank’s underestimation of inflation. Prime Ministers Rishi Sunak and Jeremy Hunt said they supported the bank’s efforts. They appear wary of attacking the bank after former Prime Minister Liz Truss caused economic turmoil in part by questioning some of Britain’s independent institutions.
The Bank of England was granted independence as to how it operates in 1997, but it is the Government that sets the inflation target and appoints the Governor. Bailey’s term runs until 2028.
However, his reputation could be at risk. Public confidence in the Bank of England is at its lowest level on record since 1999. Only 21% said they were satisfied with the way the central bank did its job of setting interest rates to keep inflation in check. According to a survey released last week by the bank. The central bank’s governing body decided last month to commission an “extensive review” of its forecasts and other processes.
“The market is arguing that they have lost confidence in the bank,” Oxford Economics economist Andrew Goodwin said before Thursday’s rate decision.
Goodwin said the 0.5-point gain was “an attempt to send a strong signal.” But now, traders will expect more rate hikes and more “tough negotiations” until the central bank “gets the inflation situation back on track.” Goodwin expects the bank to raise interest rates to 5.75% within the next three months.
In financial markets, traders expect interest rates to peak just above 6% at the end of the year.
Even if the unexpectedly large rise in interest rates has had some effect in alleviating investor concerns, it has sparked criticism in other areas.
Mortgage holders are increasingly worried about rising payments as more than one million households end their fixed-term contracts this year and need to reset their loan rates. Economists at the Fiscal Institute said this week that if mortgage rates stay high, payments for 1.4 million homeowners will rise by at least a fifth of their disposable income.
The government has ruled out providing direct financial assistance to mortgage holders, but on Friday the UK’s largest financial institution gave citizens a 12-month grace period if they failed to make payments before foreclosure proceedings. agreed to give
Sharon Graham, chairman of Unite, one of Britain’s biggest trade unions, said raising rates was the wrong choice and “causing pain to ordinary families”.
Others agree. “I’m not convinced this was the right move,” said Jajit Chada, director of the National Institute of Economic and Social Research, adding that policymakers should not act further. He said past rate hikes have provided enough downward momentum to see inflation slow down over the next few years.
Mr Chadda said what the Bank of England needed was clearer communication that it would take a long time for inflation to come down. One reason for this is factors beyond the control of the Bank of England, such as the tightening of the labor market, which is one of the consequences of Brexit. That action will work in the end.
This clear message “could have given households a sense of security and prevented financial markets from betting on banks, and that’s what we’ve seen in the last week or so,” Chadha said. rice field.