Stubborn Inflation May Lead To Further Interest Rate Rises

April 24, 2023

Inflation for March fell by less than expected, dropping from 10.4% in February to 10.1%, defying predictions that it would fall below double digits. This has led to the likelihood that interest rates will rise yet again, possibly reaching 5% by the autumn.

The Bank of England (BoE) has already made a series of rises since December 2021 in an attempt to combat inflation, which it aims to keep below 2% in normal circumstances. Inflation peaked at 11.1% in October last year, in response to higher energy prices and a sharp increase in the cost of food.

According to The Guardian, the cost of food and non alcoholic drinks are now growing at the highest annual rate since 1977. The UK has seen a rise of 19.1% in average annual food bills since March last year, with most dairy products increasing by around 30%. The cost of other products such as clothing and household items has also increased.

Debapratim De, senior economist at Deloitte, said: “Inflation has come in above expectations. Food prices have risen at the fastest pace in over 45 years and even after excluding the effect of food and energy prices, residual inflation remains stubbornly high. Interest rates seem likely to remain at their peak for longer than markets are expecting.”

Residual inflation means the core inflation rate, stripping out volatile food and energy prices, which stands at 6.2%. All this means that the Monetary Policy Committee’s next base rate announcement on May 11 will almost certainly usher in yet another interest rate rise, despite hopes that the current 4.25% base rate would mark a turning point back to low rates.

Kitty Ussher, the chief economist at the Institute of Directors said “The Bank of England’s job is not yet done”.

She added: “While it is a relief that the headline rate of inflation is now pointing downwards again … the improvement this month is predominantly due to falling transport prices which, although welcome, hides an underlying stickiness in core inflation, which at 6.2% has not yet started to fall.”

For mortgage payers, this will mean even more pain in the form of increased monthly repayments. Those on tracker rates or SVR deals will feel the impact straight away, while those coming to the end of a fixed term two or five year deal will need to brace themselves for a steep rise in the amount of interest they are repaying.

However, there are more positive signs on the horizon. Economists still believe that inflation will halve by the end of the year, when the effect of lower energy prices finally feeds down into the economy. This will eventually lead to a fall in interest rates and correspondingly, mortgages will become more affordable.

Anyone who is looking for a new mortgage deal at the moment is advised to seek the services of a professional mortgage broker to help them source the most suitable products.

If you are looking for bad credit mortgage brokers, please get in touch today.

Your home may be repossessed if you do not keep up with your mortgage repayments.

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