- Bank of England Chief: Interest Rates Linked to Easing Inflation
- Prolonged Period of Elevated Interest Rates to Tackle Inflation
- Factors Influencing Inflation and Monetary Policy Considerations
The head of the Bank of England has stated that interest rates will not be lowered until there is “solid evidence” that price inflation is easing.
After price and wage stability, according to Andrew Bailey, interest rates will fall.
The Bank raised rates for the fourteenth time to 5.25 percent from 5 percent on Thursday, a 15-year high.
For some, the change will result in increased mortgage and loan payments, but it should also increase savings rates.
For the first time, the Bank declared that interest rates will remain high longer to battle rising prices.
Before reducing interest rates, Mr. Bailey stated that he would need more evidence that inflation was declining.
“By solid, I mean that people can rely on it and say, ‘I’m going to factor that into my expectations,’ so that when prices and wages are set, people can say, ‘Yes, I understand that inflation is decreasing,'” he explained.
The Bank has not specified how long rates will remain elevated; however, some economists, such as Capital Economics, have predicted that rates will rise to 5.5% in September and remain there for a year.
Mr. Bailey stated, “We are obligated to ensure that inflation falls back to the 2% target, as we are aware that it disproportionately affects the less fortunate.”
Inflation, the rate at which prices increase, is presently four times the Bank’s target rate of 7.9%.
The Bank has raised interest rates to reduce inflation by raising borrowing costs and limiting consumer spending.
Chancellor Jeremy Hunt acknowledged that an increase in interest rates would be “worrying for families with mortgages and businesses with loans,” but he reaffirmed the government’s objective to reduce inflation.
In the past, however, the Bank’s inflation forecasts have been imprecise on six of the last eight occasions.
Mr. Bailey says it is now “more certain” than in the past that inflation will decline.
Before the Bank began to raise interest rates in December 2021, they had been below 1% for over a decade.
Jo Bevilacqua, owner of a hair salon in Peterborough, says she understands the economics behind rate hikes, but she finds them “difficult to swallow” because her business relies on consumer spending.
“We are still in the phase of pandemic recovery. We do not want individuals to spend less. Our livelihoods depend on them,” she says.
If they do not spend money, we cannot keep our doors open, pay our employees, or pay our vendors. Jo’s finances are not immune to the effects of rising interest rates. She switched to an interest-only mortgage when her business began to falter.
“To re-mortgage, I need to be in a position where everything has settled down. It appears to be a three-pronged assault. My mortgage payments are increasing, but so are those of my employees and patrons.”
The Bank predicted that the impact of its rate hikes on individuals and the economy would intensify next year, with growth remaining sluggish and smaller than it was before the pandemic.
However, it was stated that the United Kingdom would avoid a recession.
A developing economy means that there are more jobs, that businesses are more profitable, and that they can pay their workers and shareholders more. Higher earnings and profits generate additional tax revenue for the government.
Increasing food prices have been one of the most significant contributors to inflation, but the Bank stated that there was evidence that the increases were moderating, albeit gradually.
Mr. Bailey remarked that it had taken longer than many had anticipated for food price inflation to decelerate, adding that energy is a significant cost for food production.
Mr. Bailey said the Russia-Ukraine conflict has raised fertiliser prices for businesses, notably farmers. Both countries export fertiliser, and Mr. Bailey said food growers “bought ahead for a longer period” to ensure availability.
He also stated that he did not anticipate Russia’s recent withdrawal from the grain agreement with Ukraine to have a significant impact on wheat prices, but he added, “I believe this is something we must monitor closely.”
