The United Kingdom is set for its “14th consecutive” interest rate hike in an ongoing trend.
The “Bank of England” is set to raise interest rates for the “14th consecutive” time in its ongoing effort to rein in persistently high inflation. Economists largely anticipate a rise to 5.25% from the current 5% by Thursday noon. This adjustment would result in increased interest payments for mortgages and loans for certain individuals while also leading to higher savings returns.
The UK has been grappling with elevated inflation rates, which continue to strain households. Despite a recent dip in June, inflation remains at 7.9%, significantly surpassing the Bank of England’s 2% target. Policy experts at Pantheon Macroeconomics argue that this could moderate the need for interest rate hikes compared to previous projections.
The central bank’s strategy involves making borrowing costlier with the goal of curbing spending and subsequently reducing consumer demand. This, in turn, is expected to lower price increases. However, the bank must strike a balance, as overly aggressive rate hikes could trigger an economic downturn, while refraining from raising rates might exacerbate inflation.
The Institute of Economic Affairs (IEA), a free-market think tank, contends that the Bank should allow previous rate hikes and declining global commodity prices to take effect before implementing further increases. Trevor Williams, a former chief economist at Lloyds Bank and IEA member, warns against unnecessary rate rises that could potentially harm the economy without expediting inflation reduction.
Despite concerns, the Bank’s Governor, Mr. Bailey, has denied allegations of intentionally inducing a recession to combat inflation. He has emphasised the importance of addressing high inflation levels. Notably, the ongoing rate adjustments have already begun to influence the UK economy, as evidenced by a notable 14-year low in annual house price growth in July.
Prime Minister Rishi Sunak acknowledges that inflation is not decreasing as rapidly as desired, but he remains optimistic about the future. He believes that there is hope on the horizon, even as the economy navigates the challenges posed by inflation and interest rate adjustments.
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