Latest inflation figures pose headache for Bank of England

Inflation seems intent on embarrassing economic forecasters, as May’s CPI inflation sees it wedged flat at 8.7%, the same figure for April. What’s particularly worrying central bankers, though, is core inflation – which strips more volatile items such as food and energy – as the figure has actually risen from 6.8% in April to 7.1% in May – the highest in 31 years.

Myron Jobson, Senior Personal Finance Analyst, interactive investor, explains

“Inflation is not playing ball therefore the Bank of England felt it had little option but to crank up interest rates even more this time around despite the broader implications of the uptick in borrowing costs.

“To get a sense of whether embedded inflation is becoming a problem, you have to strip out the highly volatile prices like food and energy from the picture. That’s why the BoE focuses on ‘core’ inflation to gauge if inflation is getting built into the economy. The fact that core inflation rose to its highest level in 31 years, hitting 7.1% in May despite consecutive interest rate hikes is concerning.

As a result, on June 22nd, the Bank of England voted to raise interest rates for the 13th time, and by a chunky 0.5% to 5%. 

Jobson adds: “Interest rate rises have been called a blunt instrument, but with very few tools in the box, it seems a sledgehammer is required to fight inflation. 

Laura Suter, head of personal finance at AJ Bell, goes into more detail:

“What’s…. surprising is that not a single member of the MPC wanted to raise rates by just 25 basis points: seven of the committee voted in favour of the 50 basis points hike, while the remaining two continued to maintain that holding rates was the best course of action.”

“The rate-setters acknowledge that the tendency for UK homeowners to be on fixed rate deals mean that so far, many people have been protected from the impact of rising interest rates, which is acting as a drag on the effectiveness of these continual rate hikes. And the logic of the two MPC members who wanted to hold rates at 4.5% is worth noting: they think that the energy market falls and impact of interest rate hikes will filter through the system in time, without further rate hikes, and that there is a real risk the Bank overshoots its target by continuing to hike rates.”

Jobson adds: “In the meantime, many households will continue wrestle with a double whammy of rising borrowing costs and stubbornly high inflation which threatens to lay waste to finely tuned budgets.

Mortgage holders

Suter outlines the pain for mortgage holders:

“The plight of those 800,000 homeowners coming to re-mortgage before the end of the year has been well publicised, but there’s no avoiding the fact that the mortgage market is a horror show for anyone whose fixed rate deal ends in the next few weeks. Many who fixed two years ago are facing the prospect of a tripling of their mortgage interest, which will add hundreds of pounds to the average monthly mortgage bill. 

“The worst thing a homeowner can do right now is bury their head in the sand and just let their fixed-rate deal end. The Standard Variable Rates that mortgage lenders charge those who have come off their fixed deal are truly eye-watering now, standing at 7.5% on average* – even one month of mortgage payments at that rate could be crippling to someone’s finances.”


Suter explains that at least there’s better news for those saving their cash:

“Savers are clearly enjoying the fact that banks have upped their rates and average easy-access accounts have risen from 1.55% a year ago to just over 4% today*. However, the government is the biggest winner of this rise in savings rates, as it’s raking in far more tax than it expected. Last tax year it took in £3.4 billion in tax on savings – almost £2 billion more than the previous year. Savers who are benefitting from this rise in savings rates need to seriously consider whether a shift into an ISA is a good option, in order to protect their money from the taxman.

“But there is a sting in the tail here: ISA cash rates are often lower than non-ISA accounts. The gap has historically been higher but it has narrowed in the recent savings war. For example, the current top rate non-ISA easy-access account pays 4.01% but the top ISA version pays just 3.78%. Savers will need to do their sums to work out whether it’s worth picking a higher paying non-ISA account and paying tax on their savings interest, or putting it in an ISA and accepting a lower rate. It will depend on the size of their savings but also their income tax band, and so how much tax they are paying on their savings.”

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Marcus De Silva
Date published:
30 / 06 / 2023
Reading Time:
3 minutes