Bank of England Hikes Interest Rates to 5%

Facts

• UK interest rates reached a 15-year high Thursday after the Bank of England (BoE) raised the key rate by half a percentage point to 5%. This came just one day after new data showed inflation was still higher than anticipated, sitting at 8.7% in May.¹
• By a 7-2 decision, the BoE’s Monetary Policy Committee (MPC) voted for the rate hike, including BoE Gov. Andrew Bailey, who said that "recent data…showed that further action was needed" to bring down inflation to the 2% target.²
• While a 13th consecutive hike was widely expected, the half-point increase surprised many economists who predicted a 0.25% increase. Markets are now prepared for rates to reach 6% in the near future, the highest since 2000.³
• Conservative lawmaker Jake Berry says Britons are preparing for a "mortgage bomb," with the average two-year fixed-rate mortgage rising above 6% this week and the Institute for Fiscal Studies predicting average monthly payments to rise by £280 ($357) compared to last March.⁴
• Fears of a mortgage crisis and recession are rising as the UK’s main rate has risen from 0.1% to 5% since late 2021, but the MPC says the rate hike’s impact on mortgages won’t "be felt for some time."⁵
• PM Rishi Sunak maintains that fighting inflation is his top priority and will support the BoE’s efforts. However, experts say that the UK's chances of avoiding a recession are “slim” as core inflation– which excludes energy and food prices– reached a 31-year high.⁶

Sources: ¹Reuters, ²Yahoo Finance, ³Associated Press, ⁴CNN, ⁵CNBC, and ⁶Guardian.

Narratives

• Pro-establishment narrative, as provided by Investment Week. The BoE recognizes the harsh realities of the UK’s current economic situation, but it will continue to make the tough decisions to bring down inflation despite short-term hardships. No one wants a recession, but a brief dip in GDP is well worth a return to 2% inflation and less volatility. Recovery from the pandemic has been difficult for all countries, but the UK will weather the storm just like it has in the past.
• Establishment-critical narrative, as provided by The Telegraph. The BoE has been inflicting unnecessary pain on the UK for nearly two years, particularly on average British households. Despite its continued rate hikes that have the UK on the verge of a mortgage crisis, core inflation continues to rise with no end in sight. The BoE has provided little clarity, and its mixed messaging has made a bad situation even worse. From the top down, the BoE has failed.

Predictions

What will be the UK’s annual inflation rate in the following years?

Showing the aggregate of 32 community forecasts as of Jun 23, 2023.

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