Bank of England: Food prices mean inflation will fall more slowly

According to a recent warning from the Bank of England, rising food costs will cause inflation to slow down less quickly than expected. Despite raising interest rates to 4.5% from 4.25% in an attempt to curb soaring price increases, the Bank believes that inflation will "fall sharply in April" but not as much or as fast as previously thought. Although the Bank is more optimistic about the UK's growth potential and has raised its forecast, it predicts that inflation will persist longer than expected. The Bank's interest rate hikes, which have occurred 12 times since December 2021, have not been able to counter the rate of inflation, which is currently at 10.1% annually.

In theory, the rise in interest rates should encourage people to save more money and borrow less, resulting in less spending and fewer purchases, ultimately slowing down price increases. However, it also makes it harder for businesses to borrow money and grow. The increase in interest rates will also result in higher mortgage and loan payments for some individuals, although it may benefit savers. A typical tracker mortgage customer will be paying approximately £417 more per month, and variable rate mortgage holders about £266 more compared to pre-December 2021 when interest rates began to rise.

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Despite the Bank's attempt to slow down inflation, it is predicted to drop to 5% by the end of this year, above the previously predicted 4%, and more than double the Bank's target of 2%. The Bank of England Governor, Andrew Bailey, has acknowledged the difficulty the rise in food prices poses for people, particularly those on lower incomes, but believes that food price inflation will slow down. The UK government has pledged to halve the inflation rate by the end of this year.

Shadow Chancellor Rachel Reeves criticized the rise in interest rates, saying it would cause anxiety among people. Chancellor Jeremy Hunt acknowledged the disappointment of the interest rate rise for families with mortgages, but highlighted that tackling rising prices is essential to combat the ongoing cost of living crisis.

The Bank attributes the persistent high food prices to Russia's war on Ukraine and supply chain disruptions in Europe. Earlier this year, some supermarkets imposed restrictions on certain fresh produce due to the effects of hot weather in Europe and North Africa on the levels of produce. The Bank believes that the impact of all interest rate hikes has not yet been fully felt by the British public, particularly those with fixed-rate mortgages. According to the Bank of England, around 85% of all mortgages are fixed-rate, and about 1.3 million households are expected to reach the end of their deals this year. People looking to re-mortgage this year could face a £200 increase in monthly payments based on current rates.

One person who experienced the consequences of interest rate hikes is Cheryl from Bromley, Greater London. She had to sell her house and move back in with her parents after her monthly mortgage payments rose from £1,200 to £2,200 following last year's interest rate hikes. As a single parent, she could not afford the higher payments and had to live with her parents while her daughter went to live with her father.

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Overall, the Bank of England's attempt to curb inflation through interest rate hikes has not been as successful as anticipated. While the Bank is more optimistic about the UK's growth prospects, inflation is expected to persist longer than expected, particularly due to rising food costs. The rise in interest rates will have consequences for individuals, particularly those with fixed-rate mortgages, who may face higher monthly payments.

source: 3newsplus

source: BBC