Mortgage costs are going up – again. Last week’s 0.25 per cent Bank of England hike, along with the latest disappointing inflation data, suggests that interest rates will be pushed even higher in the coming months, and market rates for overdrafts, business borrowing and mortgages will follow suit. What will it mean for politics?
Isn’t inflation falling rapidly already?
Yes and no. There was certainly a sharp drop in the annual rate for April, to 8.7 per cent, down from 10.4 per cent in March, driven by lower energy prices. Even so, it was smaller than investors were expecting, and thus they will be expecting commensurately higher returns from sterling debt, meaning higher interest rates. Because of the higher reading, and the fact that inflation is becoming self-generating via higher wage rises, the Bank of England also feels obliged to choke it off by taking spending power out of the economy, meaning that businesses and retailers eventually can’t afford to raise prices again. That will squeeze inflation out of the system, and back to the 2 per cent target – but it will hurt.
