Financial crisis looms: Bank of England increases interest rates due to inflation shortcomings

In the latest economic development, the Bank of England has raised interest rates to 5%, the highest in 15 years, in a bid to combat persistently high inflation. The inflation rate, as reported by the Office for National Statistics, remains at 8.7%, unchanged from four months prior.

The latest inflation figures go against the Bank of England's reassurances that 2023 will see inflation fall quickly. Core inflation, which affects energy and food costs, is at its highest since 1992, reaching 7.1%. These figures have caused concern among economists and industry leaders alike.

Douglas Grant, Group CEO at Manx Financial Group PLC, stated that inflation figures remain stubbornly high. Charles White Thomson, CEO at Saxo UK, echoed this sentiment, calling the latest inflation figures disappointing and stating that the UK is in an economic danger zone.

The rise in interest rates follows expectations of a 0.25% increase, but the Bank of England raised rates by 0.5%. This decision was made in response to the ongoing inflationary pressures, which have been exacerbated by various factors.

The prices for air travel, recreational and cultural goods, second-hand cars, live music events, and video games have contributed to the high inflation rates. The global banking sector is showing signs of weakness, and UK debt is currently higher than annual GDP for the first time since 1961.

In response to these challenges, the British government led by Prime Minister Keir Starmer has announced measures aimed at lowering the inflation rate in the UK. Finance Minister Rachel Reeves emphasized ongoing efforts to reduce living costs amid rising inflation. The Bank of England, meanwhile, has adjusted interest rates as part of its monetary policy to address inflation concerns.

However, the ongoing inflationary pressures have not gone unnoticed by the public. The Institute for Fiscal Studies predicts that almost 1.4 million mortgage holders will see 20% of their disposable income erased by the surge in borrowing costs, as the average two-year fixed rate deal for mortgages has risen to 6.19%.

In light of these challenges, SMEs (organisations with fewer than 250 employees) are advised to review their existing lending structures due to ongoing challenges. K. Mitch Hodge and Nick Pampoukidis have captured these challenges in their photographs for this article.

As the UK economy continues to navigate these challenging times, it remains to be seen how the ongoing efforts by the government and the Bank of England will impact inflation and the broader economy. Financial markets are betting that the Bank of England will increase interest rates today by at least a quarter-point from the current level of 4.5%. Thomson, however, suggested that the Bank of England needs to take quick action, possibly a 50-basis point hike, to combat inflation effectively.

Financial crisis looms: Bank of England increases interest rates due to inflation shortcomings