London (Parliament Politic Magazine) – The boss of the Bank of England, Andrew Bailey, has informed the BBC that interest rates will not decrease until there is concrete evidence that the rapid increase in prices is slowing down. Bailey stated that rates would only drop once both prices and wages stabilize.
These comments come after the Bank raised interest rates to a 15-year high of 5.25% from 5% on Thursday, marking the 14th consecutive increase in rates. While this move will result in higher mortgage and loan payments for some individuals, it should also lead to higher savings rates.
Bank Of England Take Attempts To Combat Price Rise
In an effort to combat soaring price rises, the Bank announced for the first time that interest rates would remain elevated for a longer duration. Bailey emphasized that he would require more evidence of inflation decreasing before considering a rate cut.
Bailey clarified that by “solid evidence,” he means evidence that people can rely on and incorporate into their expectations. He explained that when prices and wages are determined, individuals should be able to confidently say that inflation is decreasing.
The Bank has not provided a specific timeline for how long rates will remain high. However, some economists, including Capital Economics, have predicted that interest rates will rise again in September, peaking at 5.5% and remaining at that level for a year.
Mr. Bailey emphasized the importance of ensuring that inflation falls back to the Bank’s target of 2%. He acknowledged that inflation disproportionately affects the least well-off individuals and emphasized the need for it to decrease.
Banks Have Been Increasing Interest Rates
Currently, inflation, which measures the rate at which prices rise, is four times higher than the Bank’s target at 7.9%. The Bank has been increasing interest rates to curb price rises, aiming to make borrowing money more expensive and reduce people’s spending.
Chancellor Jeremy Hunt has acknowledged the concerns of families with mortgages and businesses with loans regarding the potential rise in interest rates. However, he has reiterated the government’s commitment to reducing inflation.
Unfortunately, the Bank’s inflation forecasts have proven to be inaccurate in the past, with six out of the last eight predictions being overly optimistic. Mark Bailey, an expert in the field, believes that the current forecasts are more reliable and that inflation will indeed decrease.
It is important to note that interest rates had remained below 1% for over a decade until December 2021, when the Bank decided to raise them.
Economic Crisis Due To High Inflation Rate In The UK
Jo Bevilacqua, owner of a hair salon in Peterborough, understands the economic rationale behind rate hikes. However, she finds it difficult to accept, especially considering that her business relies heavily on consumer spending.
“We are still in the process of recovering from the pandemic. We do not want people to reduce their spending. Our livelihoods depend on their support,” she explains.
If customers stop spending money, Jo’s salon will struggle to keep its doors open, pay its staff, and meet its financial obligations to suppliers. Jo herself is not immune to the impact of rising rates, as she had to switch to an interest-only mortgage when her business faced difficulties.
“I need things to stabilize before I can consider refinancing. It feels like a triple blow. Not only are my mortgage payments increasing, but my staff and customers are also affected,” she laments.
Impact Of Rate Increase Will Affect Individuals and Economy
The Bank has stated that the impact of its rate increases will have a more significant effect on individuals and the economy in the coming year, resulting in continued sluggish growth that is smaller than pre-pandemic levels. However, the Bank assures that the UK will avoid a recession.
A thriving economy brings about numerous benefits, including increased job opportunities, higher profitability for companies, and the ability to provide better compensation to employees and shareholders. Additionally, higher wages and profits contribute to increased tax revenue for the government.
While rising food prices have been a major driver of inflation, the Bank notes that there is evidence of a gradual slowdown in these increases. The Governor, Mr. Bailey, explains that food price inflation has taken longer to decelerate due to the significant cost of energy in food production.