BoE Governor warns as interest rates peak

Bank of England Governor Andrew Bailey has indicated that the current trajectory of interest rates may be approaching its zenith but stopped short of ruling out further increases. Speaking before MPs on the Treasury Select Committee, Bailey noted that “we are much nearer now to the top of the cycle” in terms of rate hikes.

The central bank has executed 14 consecutive rate hikes, a testament to its commitment to tempering inflation, which has surged at a pace outstripping that of other major global economies. The impending move by the Bank of England to raise borrowing costs once more later this month is poised to catapult the Bank rate to 5.5%.

The overarching strategy behind these rate hikes is to elevate the cost of borrowing, thereby constraining consumer spending and curbing demand, ultimately quelling the relentless rise in prices, which underpins inflation. However, it is noteworthy that the current Bank rate is perched at its loftiest level in 15 years, while inflation has remained persistently elevated, with July registering a rate of 6.8%, albeit down from June’s 7.9%. This figure still stands far above the government’s inflation target of 2%.

Governor Bailey acknowledged that there are signs of inflation’s deceleration but emphasised the uncertainty surrounding its impact on wage growth, which recently reached a historic peak. Heightened wage growth can act as a catalyst for inflation.

He stated, “Many of the indicators are now moving as we would expect them to move, and are signalling that the fall in inflation will continue and – as I’ve said a number of times – I think will be quite marked by the end of this year.” Bailey also raised the pertinent question of whether the drop in headline inflation would be paralleled by a decline in inflation expectations and wage negotiations.

The cooling of Britain’s economic activity following the rapid ascent of borrowing costs has emerged as a prominent theme. Rising wages have garnered particular attention within the Bank. Bailey’s remarks hint at a potentially more subdued pace of rate increases in the ensuing months, a deviation from market expectations.

Nevertheless, he underscored that the forthcoming decision, slated for September 21, will hinge on the most current evidence, including data pertaining to employment, economic growth, wages, and inflation. Additionally, Bailey reiterated the possibility of sustained high-interest rates for an extended period.

The repercussions of these rate hikes have already made a significant impact, with over half of mortgage holders experiencing the sting of higher rates. As fixed-rate mortgage deals expire in the months to come, many more individuals could find themselves grappling with increased monthly repayments, potentially amounting to hundreds of pounds.