The Bank of England (BoE) has taken another step in its ongoing battle against inflation in the UK by raising interest rates for the 14th time in a row. The latest increase of 0.25 per cent brings the interest rate to a new high of 5.25 per cent. This article examines how these rising interest rates will impact individuals’ financial situations, with a particular focus on the UK housing market. Additionally, it explores economists’ predictions for the future of the UK economy as interest rates continue to climb.
An increase in the number of British mortgages
The escalation of interest rates has a detrimental effect on personal finances. As interest rates climb, individuals with bank loans, including UK mortgage borrowers, must allocate more significant sums toward repaying their debts. Forecasts from experts indicate that to mitigate the current average inflation rate of approximately 8% in the UK, the nation’s interest rates may need to undergo two additional increments.
Rishi Sunak’s delusional optimism about reducing the inflation rate
UK Prime Minister Rishi Sunak asserted that the government’s anti-inflationary measures had succeeded, signalling a potential solution for curbing inflation. However, the Independent has opined that the minister’s optimism appears misguided and is unlikely to sway voters towards supporting the Conservative ruling party’s candidates in next year’s upcoming general election. Furthermore, the UK government conspicuously disregards the impact of escalating interest rates on personal finances.
The highest rate of UK inflation in the last four decades
Following the global financial crisis of 2008, interest rates within the UK have yet to surpass the 5% threshold. Likewise, central banks in both America and Europe have recently implemented increments in their bank interest rates. Despite the UK government’s commitment to maintaining a 2% inflation rate, the elevation in energy and fuel costs due to the Ukraine conflict and the Western governments’ sanctions on Russian oil and gas, coupled with an unprecedented surge in the prices of commodities and services, has resulted in the UK experiencing its highest inflation rate in over four decades.
The possibility of economic recession in the UK
According to the Daily Mail, some experts believe that the Bank of England knows no other way to reduce inflation than by increasing the inflation rate, and raising the bank interest rate may lead to economic stagnation in this country. This newspaper added: Experts say that the BoE should deal with the root of inflation because the increase in bank interest in the last 13 months has had a negligible effect on the inflation rate and led to the stagnation of various economic sectors and reduced investment motivation. Among other things, it has led to the UK housing market.
Successive increase in interest rates by the Bank of England
The Bank of England has increased the interest rate for the 14th consecutive time in this country, and there is no hope of changing this trend before the national elections. Andrew Bailey, the head of the Bank of England, increased the bank interest rate from 5% to 5.25%, the highest interest rate in the last 15 years.
Interest rates will increase until prices decrease.
The Bank of England’s Governor has declared his intention to persistently raise the interest rate until achieving a firm grip on inflation rates and effective price management and reduction. He articulated that the interest rate escalation would be halted once costs and wages stabilize. These remarks from Bank of England Governor Andrew Bailey followed the announcement of the bank’s decision to elevate interest rates from 5% to 5.25%. This figure marks the highest interest rate recorded in the past 15 years, marking the 14th successive increase in interest rates within the nation.
Economists’ prediction of the effects of interest rate increases again
It is unclear how long interest rates in the UK will remain high, but economists predict that the central bank will raise the pace again in September to 5.5% and keep it there for one year. The Bank of England’s goal is to achieve the target inflation rate of 2%. The current interest rate is four times the target rate, equaling 7.9%.
The goal of the Bank of England is to increase interest rates.
Before December 2021, when the Bank of England initiated its interest rate hikes, the country had maintained interest rates below 1 per cent for more than ten years. The BoE’s interest rate elevation was to elevate borrowing costs and consequently curtail consumer expenditure to combat rising prices. However, specific experts believe that repeated increments in bank interest rates might steer the economy towards a recession.
The fall of the UK housing market due to the increase in interest rates
According to the Guardian, after thirteen times the monthly increase in bank interest, the price of some materials, including food and raw materials for factories, is now decreasing. This newspaper added: “Nationwide building society reported that prices fell 3.8% yearly, the sharpest drop since July 2009 when the global economy was in the financial crisis. It compared with a fall in annual prices of 3.5% in June.” Such a decrease in housing prices has yet to be seen since 2009. As a result, several housing companies have stopped their new projects because due to the high mortgage interest, people’s ability to buy housing and, as a result, the demand for believing in the UK housing market has decreased.
UK housing market recession
In July 2023, UK house prices experienced their most rapid annual decline in 14 years. The British Building Society reported a notable 3.8% drop in house prices last month, marking the most substantial yearly decrease since July 2009. The average cost of a residential property in the UK now stands at £260,828, roughly £13,000 less than the peak price registered in August 2022. However, despite these price reductions, potential buyers exhibit minimal enthusiasm for engaging in the UK housing market, mainly due to the elevated interest rates associated with bank loans.
6% mortgage rate in the UK
Mortgage rates in the UK have reached above 6%. This increase has occurred following the BoE’s efforts to curb inflation by raising the base interest rate to 5%. The inflation rate in the UK reached 7.9% last June, which is still far from the target rate of the BoE. Accordingly, it is expected that the interest rate will continue to be increased by the BoE. Last June, 86,000 transactions were made in the UK housing market, more than 100,000 less than in the previous month.
Rishi Sunak’s failure to fulfil election promises
Rishi Sunak had pledged to raise the inflation rate in the UK to 2% before the national elections in this country. Still, the rise in energy and fuel prices following the war in Ukraine, the embargo on Russian oil and gas by Western governments, and the unprecedented increase in the price of goods and services have raised inflation in the UK to the highest level in the last four decades.
