While the other central banks are beginning to slow down the pace of their interest rate hikes, the Bank of England (Bank of England, BoE) surprised Thursday, June 22, by accelerating it. It has indeed increased its key rate by 0.5 point at once, to 5%. This is the thirteenth consecutive increase since December 2021. It is also the first time since February that the BoE has raised the cost of money by as much. She had opted for 0.25 points in previous meetings. In a country where mortgages are periodically renegotiated, the case is turning into a political bombshell.
“We know it’s difficult (…) but if we don’t raise interest rates now, it will be worse later. » In one sentence, Andrew Bailey, Governor of the Bank of England, summed up the dilemma. Thursday’s decision will penalize businesses and households by increasing the cost of their borrowing, but inflation is showing worrying signs, raising fears of a loss of control.
The alert came on Wednesday, when the British Statistical Institute published the figure for the rise in prices for the month of May: 8.7%. That is a stable level compared to April. Unlike the United States or the euro zone, inflation is not falling.
Inflation above forecasts
Worse still, everything indicates that it is spreading throughout the economy. The rise in so-called “underlying” prices, that is to say excluding food and energy prices, which are very volatile, rose from 6.8% in April to 7.1% in May. This is its highest level since March 1992. The prices of services also soar, from 6.9% to 7.4%. For the Bank of England, which has a mandate to keep inflation at 2%, these indicators are unacceptable. Its monetary policy committee voted overwhelmingly, by 7 votes to 2, for this sharp rise in interest rates.
The persistence of inflation in the United Kingdom is largely due to its labor market. With only 3.8% unemployment, the country faces a critical labor shortage. Logically, employees take the opportunity to demand substantial salary increases. In April, the average increase over one year reached 7.6%.
Good news for the British, who thus avoid losing too much purchasing power? “I’ll be honest, it’s untenable over time”, replies Andrew Bailey. It evokes what economists call the “second-round effects”that is to say this self-sustaining spiral of inflation, which pushes employees to demand better wages, which encourages companies to raise their prices, and so on.
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