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Bank of England 'loses its grip' on inflation as interest rate rises to shock five percent

NewsBank of England 'loses its grip' on inflation as interest rate rises to shock five percent

The Bank of England has “lost its grip” on inflation and is “piling more misery” on borrowers, an estate agent boss has said. Britain’s central bank raised its interest rate to five percent in its 13th rise in a row amid mounting calls for the Government to do more to help amid a deepening mortgage crisis.

In a statement on Thursday, the Bank said its nine-member Monetary Policy Committee decided to lift its main interest rate by half a percentage point to a fresh 15-year high of five percent.

The decision came as a surprise with most economists predicting a smaller quarter-point hike.

But figures on Wednesday showed UK inflation unexpectedly holding steady at 8.7 percent, fueling concerns over the outlook for prices. There had been predictions for a modest decline to 8.4 percent.

The rate hike piles further pressure on borrowers, particularly the 1.4 million or so households in Britain that will have to refinance their mortgages over the rest of the year.

Sambit Bhattacharyya, Professor of Economics and Head of Department of Economics at University of Sussex, said failing to raise rates would have made the Bank’s rate-setting Monetary Policy Committee look soft on inflation which would spur inflation expectations even further.

He told Express.co.uk: “We can expect a further housing market slowdown, however, the effects are unlikely to be catastrophic as was initially predicted by some analysts. The housing market appears to be more robust than anticipated.

“We can expect a slow adjustment of the housing market with positive demographic factors likely to contribute to housing demand and support prices.”

Professor Bhattacharyya said Thursday’s rate rise will add to the UK’s fiscal deficit, increasing the Government’s debt servicing costs.

He added: “The market is already factoring in future rate rises with both three-year and 10-year yields on UK gilts rising. In order to slacken inflationary pressure, HM Treasury would seriously need to consider cutting spending.”

With the Government and Bank under increasing pressure over their failure to curb inflation, Prime Minister Rishi Sunak has insisted he feels a “deep moral responsibility” to deliver on his pledge to halve inflation by the end of the year.

Downing Street has said Bank Governor Andrew Bailey has the Prime Minister’s support, but No 10 declined to go as far as saying Mr Bailey and the Bank had done a good job in tackling inflation.

A No 10 spokesman said: “The Prime Minister thinks is important that we continue to support the Bank in the work they are doing.

“You’re aware that there’s an independent process for setting interest rates, and we continue to work closely with them and work well with them to bring down inflation.”

The spokesman said that Mr Bailey “continues to have the Prime Minister’s support.

Chancellor Jeremy Hunt said high inflation is a “destabilising force” eating into pay cheques and slowing growth.

He said: “Core inflation is higher in 14 EU countries and interest rates are rising around the world, but the lesson from other countries is that if you stick to your guns, you bring inflation down.

“Our resolve to do this is watertight because it is the only long-term way to relieve pressure on families with mortgages. If we don’t act now, it will be worse later.”

Bank of England Governor Andrew Bailey said policymakers have “got to deal with” inflation now or warned the cost crisis will get worse.

He said: “We’ve raised rates to five percent following recent data which showed further action was needed to get inflation back down.

“The economy is doing better than expected, but inflation is still too high and we’ve got to deal with it.

“We know this is hard – many people with mortgages or loans will be understandably worried about what this means for them.

“But if we don’t raise rates now, it could be worse later. We are committed to returning inflation to the two percent target and will make the decisions necessary to achieve that.”

He warned further rate rises could be required if inflation remains stubbornly high.

In a letter to Mr Hunt setting out the MPC’s decision, he said the “second-round effects in domestic price and wage developments” following the external shocks of the pandemic and war in Ukraine “are likely to take longer to unwind than they did to emerge”.

He added: “The MPC will continue to monitor closely indications of persistent inflationary pressures in the economy as a whole, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation.

“If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.”

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