Bank of England: Prices to be higher for longer as rates rise

The rate of price rises will remain higher for longer, the Bank of England has warned, as it raised interest rates to their highest in almost 15 years.
Interest rates were increased to 4.5% from 4.25% – the 12th rise in a row on Thursday.
Bank boss Andrew Bailey said high food costs meant it was taking longer for inflation to fall than it had expected.
But he was more optimistic on how quickly the UK economy would grow, saying it would avoid recession.
Despite soaring food costs, Bank governor Mr Bailey said he did not think supermarkets and other grocers were making more money than they should.
“It actually doesn’t look like that’s going on,” he told the BBC.
Some have questioned why a drop in the cost of wholesale food prices globally has not led to falls in the prices charged by UK supermarkets. One union accused some retailers of “fuelling inflation by excessive profiteering”.
UK supermarkets have said there is typically a three to nine-month lag to see price falls reflected in shops.
Inflation – the rate at which prices rise – is now expected to drop to 5% by the end of this year, above the 4% previously predicted.
UK inflation hit 10.1% in the year to March and is currently at its highest for almost 40 years and five times as high as the Bank’s 2% target.
The increase in interest rates will mean higher mortgage, credit card and loan payments for some people, but the rise in rates could benefit savers.
The theory behind the rate rises is that people will have less money to spend so will buy fewer things, which should help stop prices rising as quickly.
However, it also makes it harder for firms to borrow money and expand.
Compared with pre-December 2021 before interest rates began to rise, a typical tracker mortgage customer will be paying about £417 more a month, and variable rate mortgage holders about £266 more.
Better growth
The change in outlook for the economy contrasts sharply with the Bank’s forecast six months ago when it said the UK would enter the longest recession on record.
Mr Bailey now says there will be “modest but positive growth”.
When the effects of strikes and the extra Bank Holiday for King Charles’ Coronation are stripped out, the economy will have grown by 0.2% both in the first three months of the year and between April and June, the Bank predicts.
The Bank of England’s chief economist Huw Pill recently sparked criticism when he said people in the UK needed to accept that they would be worse off, or inflation will keep rising.
Mr Bailey said that while all inflation is difficult, rising food prices hit those on lower incomes harder because they spend a higher proportion of their money on food. “We are very, very conscious that all inflation is difficult and particularly for those least well off.”
On his colleague’s comments, Mr Bailey said: “I don’t think Huw’s choice of words was the right one… to be honest and I think he would agree with me.”
The government has pledged to halve the rate of inflation by the end of the year.
Chancellor Jeremy Hunt said: “Although it is good news that the Bank of England is no longer forecasting recession, today’s interest rate rise will obviously be very disappointing for families with mortgages.
“But unless we tackle rising prices, the cost of living crisis will only carry on.”
But shadow chancellor Rachel Reeves said the rise would leave people “wracked with anxiety”.
Falling energy prices as well as measures to help businesses and households announced in the Budget last month have led the Bank to change its forecasts.
The Bank blamed Russia’s war on Ukraine for stubbornly high food prices as well as supply chain issues in Europe.
Earlier this year, some supermarkets had to introduce limits for shoppers on some fresh goods after hot weather in Europe affected levels of produce.
Helen Parry, who works for DC Fruit and Veg in Stoke-on-Trent, says she has seen changes in her customers’ choices and how they avoid treating themselves later in the month.
“You can normally tell the first week where people have been paid,” she says.
“They come, they do their shopping, they get what they need, and as the month goes on towards when their next payday is, it slows down a little bit.
The Bank said that the impact of all the interest rate rises had yet to be fully felt by Britons, in particular those people who have a fixed-rate mortgage.
Around 85% of all mortgages are fixed-rate, according to the Bank of England, and around 1.3 million households are expected to reach the end of their deals this year.
The Bank estimates that people looking to re-mortgage this year could face a £200 hike in monthly payments based on current rates.
Cheryl in Bromley, Greater London, says the interest rate rises last year led to her having to sell her house and move back in with her parents.
“I lived with my daughter and couldn’t provide a roof over her head,” the 43-year-old says. “She had to go live with her father and I found myself back at my parents’ house.”