Borrowers in the U.K. will be bracing themselves for further increases in lending costs after official figures yesterday showed inflation failing to fall as anticipated in May.
The Office for National Statistics said inflation, as measured by the consumer prices index, held steady at 8.7% in the year to May against expectations for a modest decline to 8.4%, a development that is likely to see the Bank of England raise the cost of borrowing again on Thursday.
The agency said rising prices for flights, recreational and cultural goods and services, and second-hand cars boosted the inflation rate, while gas prices at the pump provided the biggest downward pressure.
“After last month’s fall, annual inflation was little changed in May and remains at a historically high level,” the agency’s chief economist Grant Fitzner said.
Financial markets think news of the unchanged rate will mean the Bank of England will increase its benchmark interest rate on Thursday from the current 15-year high of 4.5% by a quarter-point to 4.7%. Some economists think the bank, which is tasked with keeping inflation at around 2%, may decide to go further and raise it to 5%. Higher interest rates help lower inflation by making it more expensive for households and businesses to borrow, meaning they potentially spend less, thereby reducing upside demand pressure on prices.
“This makes a rate rise by the Bank of England this week near certain and materially increases the likelihood of further rises well into autumn,” said Debapratim De, senior economist at Deloitte.
The anticipated increase will pile further pressure on financial institutions to increase their own lending rates for loans and mortgages.
Many homeowners will be cushioned from the recent increases as they fixed their mortgages when interest rates were ultra-low during the coronavirus pandemic. However, those whose fixed rate terms expire over the coming months will face much higher borrowing rates when they look to lock in new deals. PAN PYLAS, LONDON, MDT/AP
