Interest rates are expected to rise again by 0.25% to 4.75% after figures revealed inflation remained high. The cost of food and energy is already hitting household budgets hard and an increase in interest rates will further impact mortgage rates.
The latest inflation figures were revealed this morning by the Office for National Statistics (ONS). Inflation, which measures the pace prices rise at, was 8.7% in the year to May, the same rate it was in April. The Bank of England is tasked with keeping inflation at 2% but the current inflation rate is four times higher than this.
The Bank of England has been steadily raising interest rates since the end of 2021. This makes it more expensive to borrow money and theoretically encourages people to borrow less and spend less, meaning price rises should ease. However, this has led to concerns over loans, particularly mortgages, with homeowners – a third of adults in the UK – facing large increases in repayments when fixed-term deals come to an end. First-time buyers are also at risk of being priced out of the market as lending conditions become tighter.
The average two-year fixed rate mortgage on Wednesday hit 6.15%, while five-year deals were 5.79%. After today’s figures, analysts and mortgage brokers expect that typical rate to rise further.
Chancellor Jeremy Hunt has backed further interest rate rises saying the Government would not “hesitate in our resolve to support the Bank of England as it seeks to squeeze inflation out of our economy.” In comparison, Labour’s Shadow Chancellor Rachel Reeves blamed the Conservative government for failing to “get a grip” of inflation, while Lib Dem Treasury Spokesperson Sarah Olney said homeowners now “face the likelihood of even more interest rate hikes”.
Core inflation hits 31-year high
A key figure the Bank analyses when deciding on interest rates is so-called “core” inflation, which strips out direct energy and food prices, along with alcohol and tobacco. Core inflation hit it 7.1% in the 12 months to May, a jump from 6.8% in April, and is now at the highest level since March 1992.
Grant Fitzner, chief economist at the Office for National Statistics (ONS), which produces figures on the UK economy, said the increase was being driven by rising service prices in cafes, restaurants and hotels.
Pay failing to keep up with price rises has led to many households come under financial pressure in recent months. Food price inflation, which is the rate at which prices for groceries have risen compared to the year before, was 18.3% in May, down slightly from 19% in April.
Today’s inflation figures show that the rate at which food prices are increasing in the UK has fallen slightly, but costs are still going up quickly. In the UK food prices went up by more than 18% in the year to May. By comparison, In Portugal food inflation is below 10% and in Germany the figure is 14.5%.
While overall inflation has remained the same and has been on a general downward trajectory this year, core Consumer Price Index inflation has risen to 7.1% in May – that’s up from 6.8% in April and the highest its been since 1992.
Although inflation is not rising, the rate at which it remains is still negatively impacting people and has been for too long. The Government must do more to shield the population from financial burden.