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The Bank of England (BoE) raised its base interest rate for the 14th time in as many meetings, setting it at 5.25 percent, its highest in 15 years.
The increase was a quarter point in contrast to the half-point that has marked some previous hikes.
The smaller boost was attributed to inflation slowing to 7.9 percent in June from 8.7 percent in May, a greater decrease than analysts had expected.
Anticipating the new increase, the London FTSE stock index slipped 1.4 percent and the pound sank to its lowest level against the dollar since June.
BoE governor Andrew Bailey welcomed the news that inflation had eased but refused to rule out more rate bumps in the future because the bank must “make absolutely sure that inflation falls all the way back to the 2-percent target,” he said. Decisions will be based on data as they come in, he added.
From September 2022 and March of this year, the U.K. saw seven continuous months of double-digit inflation, cresting at 11.1 percent last October.
As a result, “U.K. households drew down £4.6 billion from savings, the largest amount since records began in 1997,” according to a recent study by the Resolution Foundation, which focuses on improving living standards for low- and middle-income households.
Britain’s economy is beset by other bad news, including feeble economic expansion, indicators that inflation is becoming widely embedded across the economy, and the risk of a full-on recession.
Wilco, a major British retailer, is poised for collapse, threatening 12,000 jobs, the World Socialist Web Site reported.
Inflation in service prices and wage growth both have motored ahead at an annual rate of 7 percent or more for months, both of crucial concern to policymakers. Wages grew 7.7 percent through February, March, and April but that pace will slow to 6 percent by 2024, BoE analysts said.
In contrast to wage growth, Britain’s GDP squeaked out only a 0.1-percent expansion in this year’s first quarter. More money flooding into a weak economy is a recipe for continued inflation.
Inflation will drop to 5 percent by the end of this year and reach 2 percent in 2025, BoE officials have predicted. The forecast assumes the bank’s key interest rate will stay above 5 percent through 2025.
If the forecast is wrong, it will more likely be due to inflation continuing stronger than expected rather than weaker, officials added.
Critics of the most recent rate increase were quick to pounce.
The higher rate is “too restrictive” and the British economy now “is likely to buckle further, with a shallow recession anticipated around the start of next year,” Raj Badiani, director in Europe for S&P Global, said in a public statement.
From early 2021 through the early part of this year, the U.K.’s household wealth fell from 840 percent of GDP to 650, the Resolution report said. The slide marked “the biggest fall on record…wiping out £2.1 trillion of household net worth in cash terms,” the study found.
Mortgages are already in crisis.
In the U.K., two-year, fixed-rate mortgages are common; they need to be refinanced at prevailing interest rates every 24 months.
About 1.4 million households have variable-rate mortgages, for which rates change even more often than every two years. Many homeowners told The Guardian newspaper of monthly mortgage payments that have doubled in less than a year, sometimes in one jump. “It’s a bloodbath,” one said.
Using the BoE’s forecast, the report concluded that by 2027, “almost all British households with a mortgage will have moved onto a higher rate and are set to end up with mortgage bills £2,000 higher, on average, than in December 2021.”
Mortgage interest rates have already doubled over the past 12 months, prompting the National Institute of Social and Economic Research that millions of households face “mortgage insolvency.”
The BoE was the first major central bank to begin raising rates to fight inflation, moving its base rate the first time in December 2021 but has drawn criticism for moving too slowly since then.
TREND FORECAST: The U.K.’s economy is even more precarious than the Eurozone’s.
Britain’s GDP grew by only 0.1 percent in the last quarter of 2022 and in this year’s first quarter, according to the Office for National Statistics. That rate barely kept the country out of a recession.
Things are not looking better. The U.K.’s GDP grew 0.2 percent in April but lost 0.1 percent in May, the statistics office said. Those figures are subject to revision.
Now interest rates have increased again, threatening millions of homeowners with unaffordable mortgage payments. Food inflation ran at 17.3 percent this year through June. Inflation overall was 7.9 percent last month, virtually four times the BoE’s target rate.
A catastrophic recession in the U.K. is becoming increasingly unavoidable.