UK interest rates to stay higher for longer, Bank of England says

20 minutes

The Bank of England's comments come as it announces another rise in rates to 5.25% from 5%.

Supermarket worker

Interest rates will stay higher for longer, the Bank of England has said for the first time, in an effort to battle soaring price rises.

The Bank revealed the tactic to try and curb the rising cost of living as it raised rates again to 5.25% from 5%.

Borrowing costs are now at their highest for 15 years, and will mean higher mortgages and loans payments but should also mean higher savings rates.

The Bank was more downbeat on growth, but said the UK would avoid recession.

Chancellor Jeremy Hunt acknowledged that a rise in interest rates would be "a worry for families with mortgages and for businesses with loans", but reiterated the government's aim to cut inflation.

On Thursday, the Bank signalled for the first time that it would keep interest rates higher and that they would remain higher until it got UK inflation - the rate at which prices rise - under control.

It said it would make sure rates are "sufficiently restrictive for sufficiently long" but did not spell out how long this would be.

However, Capital Economics predicted that interest rates would rise again in September to peak at 5.5% and will stay that way for a year.

Bank of England governor Andrew Bailey, said: "We know that inflation hits the least well-off hardest and we need to make absolutely sure that it falls all the way back to the 2% target."

Mr Hunt said the Bank's forecast that inflation would be down to 2.8% this time next year was vindication of the government's approach to tackling rising prices.

However, the Bank's inflation forecasts have been incorrect in the past, with six of the last eight too optimistic.

Mr Bailey says it is now "more assured" that inflation will fall than in previous forecasts.

He also says the economy has been "much more resilient" than some had feared and that unemployment remains historically very low.

Before December 2021 when the Bank starting to raise interest rates, they had been under 1% for more than a decade.

The Bank has been putting up interest rates to try to slow price rises, with the aim of making it more expensive to borrow money and reducing people's spending.

Peterborough hair salon owner Jo Bevilacqua says she understands the economics behind rate rises, but it is a "hard pill to swallow" given that her business is reliant on consumer spending.

"We are still in pandemic recovery mode. We don't want people to be spending less. Our livelihoods are in their hands," she says.

"If they are not spending money then we can't keep our doors open, pay our staff or pay our suppliers." Jo's own finances are not immune from the rates pain either. She moved onto an interest-only mortgage when her business was struggling.

"I need to be in a position where everything calms down to be able to re-mortgage. It comes to me as a three-pronged attack. There are my own mortgage payments going up, but there are also my staff and customers."

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The Bank said the impact of its rate rises would begin to hit people and the economy harder next year, with growth continuing to be sluggish and smaller than it was before the pandemic for some time.

A growing economy means there are more jobs, companies are more profitable and can pay employees and shareholders more. The higher wages and larger profits also generate more money for the government in taxes.

Rising food prices have been one of the biggest drivers of inflation, but the Bank said there was evidence that the increases were slowing, "albeit only gradually".

Mr Bailey said food price inflation had taken longer to slow than many people expected. "And that includes, I think, many people involved in the food industry."

He said that energy was a major cost for food production.

Mr Bailey also said that businesses, in particular farms, had locked themselves in to higher prices for key products such as fertiliser because of the Russia-Ukraine conflict. Both nations are major fertilizer exporters and Mr Bailey said that "out of a concern about getting access to it" food producers "bought forward for longer".

He said also said he did not expect Russia's recent withdrawal from the grain deal with Ukraine to have a major effect on wheat prices, but added: "I think it is something we have to watch carefully."

The Bank also said there was no evidence that companies were benefiting from so-called "greedflation", by putting prices up more than necessary to bolster profits.

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Additional reporting by Peter Ruddick

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