T
The occurrence of a 0.25% increase in borrowing costs this week was not surprising. As a result, both political and financial markets responded with a collective indifference. This marks the 14th consecutive rise in interest rates, bringing UK base interest rates to 5.25%. Another increase, the 15th, is widely anticipated, which means that the cost of borrowing for businesses and mortgage holders will continue to rise to levels not seen since before the 2008 financial crisis.
However, ordinary borrowers are unlikely to be as calm about this situation. Over 1.4 million people currently hold variable rate mortgages, and this latest increase adds to the financial strain they are already experiencing. Since interest rates started increasing from the historically low 0.1% rate at the beginning of last year, hundreds of pounds have been added to their monthly bills. Furthermore, this situation not only discourages new customers from taking out mortgages but also has negative consequences for the sluggish construction sector.
The Bank of England’s new normal is also proving to be harsh for businesses in various sectors. Rising rates particularly affect businesses with limited financial resources. For them and others, the risks to the economy are still present. Insolvencies are currently 40% higher compared to a year ago, and this combination of rising prices and higher borrowing costs has inevitably impacted consumer spending, as evidenced by the struggles of homeware retailer Wilko.
Although inflation may be slowing down, the UK’s inflation rate in June was still at 7.9%, four times higher than Belgium and Spain and significantly higher than France and the wider eurozone. While the rate may decrease later this month, the Bank’s commitment to achieving sustainable 2% inflation suggests that borrowing restrictions may continue to grow and remain in effect for a considerable time.
Looking ahead, Britain now faces both an economic and political race against time. The Bank’s language indicates that interest rates may not be lowered anytime soon, even if inflation decreases. It is worth noting that the Bank’s track record in forecasting such matters is so poor that Ben Bernanke, the former Federal Reserve chair, has been brought in to investigate the issue.
The decision of Wilko to enter administration puts approximately 12,000 jobs at risk within the company and its supply chains. This issue is not isolated to the retail sector. According to the Resolution Foundation, the anti-inflation strategy could result in an additional 350,000 jobs being lost.
Politically, there is a race against time to establish some form of economic stabilization before the need for a general election arises. Unfortunately, the prospects are not looking favorable. If the Bank’s warning about high borrowing costs persisting for at least two more years is accurate, Rishi Sunak will face difficulties in fulfilling at least three out of his five pre-election pledges regarding inflation, growth, and debt reduction. With the tightening situation, the narrow path to electoral victory, which was discussed by the cabinet at Chequers in January, appears even narrower than before.
Denial of responsibility! VigourTimes is an automatic aggregator of Global media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, and all materials to their authors. For any complaint, please reach us at – [email protected]. We will take necessary action within 24 hours.
