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Bank of England hikes interest rate again as British Treasury fails to curb inflation

The Bank of England in London
The Bank of England in London Copyright AP Photo
Copyright AP Photo
By Euronews with AP
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With UK mortgage holders and renters are especially exposed to effects of rate increases, fears of a 1990s-style housing crash are on the rise

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The Bank of England raised its interest rate on Thursday to 5% to combat stubbornly high inflation, which statistics this week reveal has still not declined as quickly as hoped.

The half-point hike is larger than analysts predicted, and carries serious implications for already stretched British borrowers and mortgage-holders.

It was hoped that the Bank of England might take a pause in its rate-hiking cycle if inflation showed clear signs of slowing.

But in a shock to the Treasury's expectations, figures released on Wednesday showed that inflation in the UK held steady at 8.7% in the year to May after expectations for a modest decline to 8.4%.

While that is down from 11.1% last October, the highest level since the early 1980s, the bank wants it brought down to 2%.

Recent economic data suggests that high inflation has become embedded in the economy in the form of higher wages and the prices people pay for services.

Higher interest rates help lower inflation by making it more expensive for individuals and businesses to borrow, meaning they potentially spend less, reducing demand and pressure on prices.

"Workers are suffering the steepest real-term cuts in living memory, and enormous economic damage is being done because people can't afford to pay the bills," said Gary Smith, general secretary of the GMB trade union.

The latest hike will be particularly painful for people holding loans and debt, in particular the 1.4 million or so households in the UK who will have to refinance their mortgages within the year.

According to the Joseph Rowntree Foundation, which conducts research on poverty in the UK, higher interest rates coupled with inflation are having punishing effects on the country's low-income mortgage holders, who will now face 6% interest rates on new fixed-term mortgage deals.

Many mortgage holders who rent out their properties are likely to pass these increases on to increasingly squeezed tenants.

The foundation reports that over half of low income private renters are paying more than 40% of their income on rent, leaving 78% going without at least one essential purchase.

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