Bank of England to raise interest rates in battle against inflation

Bank of England Expected to Raise Interest Rates to Combat Inflation

The Bank of England is expected to raise UK interest rates to 5.25% in an effort to combat rising inflation. This would mark the 14th consecutive increase in the cost of borrowing. The decision comes as the consumer prices index (CPI) remains well above the Bank's 2% target at 7.9%. There is speculation that the monetary policy committee (MPC) may opt for a larger increase of 0.5 percentage points, but this is considered a minority view. The Bank has been steadily increasing rates since December 2021 in response to inflationary pressures caused by Russia's invasion of Ukraine. However, concerns about the impact on the UK economy have led analysts to predict a cautious approach from the MPC.

Challenges in the Housing Market and Private Sector Activity

The housing market is already showing signs of weakness, with property prices falling at their fastest rate since 2009 and homeowners opting for longer mortgage terms to cope with higher monthly payments. Business surveys also indicate a slowdown in private sector activity, both in the UK and Europe, as consumers and businesses struggle with the increased costs of borrowing. The manufacturing industry has been particularly affected, with July seeing the worst month of the year. Despite these challenges, Prime Minister Rishi Sunak remains optimistic, stating that inflation is starting to come down and that people can see "light at the end of the tunnel." However, the Labour Party has accused Sunak of ignoring warnings about the impact of rising interest rates on pandemic-era debt, leading to higher debt servicing costs for the UK compared to other countries.

Split Views on Interest Rate Increase

The Bank's decision on interest rates is expected to be split, with some members advocating for a 0.5 percentage point increase, while others argue for a smaller increase or no change at all. The ultimate goal is to bring inflation under control and stabilize the economy.