“Mortgage misery for millions.” “Rate rise nightmare.” These were just two of the grim headlines on Britain’s front pages taking aim at the Bank of England on Friday, the day after it announced a surprisingly large increase in interest rates.
With inflation running persistently high, the country’s central bank officials took more forceful action than expected on Thursday, raising rates half a point to 5 percent, the highest level in 15 years.
“We know this is hard,” said Andrew Bailey, the governor of the central bank, acknowledging that people with mortgages and other loans would be worried about the impact of the change on their finances. “But if we don’t raise rates now, it could be worse later,” he added.
The central bank had already raised interest rates 12 times since December 2021, and still Britain’s inflation rate was stuck at 8.7 percent in May, the same as the previous month. It’s more than double the rate in the United States and notably higher than inflation in Britain’s neighbors in Western Europe.
Pressure is growing on Mr. Bailey to explain why Britain appears to be worse off and prove that the bank has a handle on the inflation problem. “Excuses, excuses,” the London newspaper The Times derided in an editorial this week, arguing that Mr. Bailey’s “alibis are wearing thin.”
Even as criticism about the bank’s underestimating price growth has swelled, Mr. Bailey’s job is unlikely to be at risk. Prime Minister Rishi Sunak and his chancellor, Jeremy Hunt, have said they support the bank’s efforts. Both are likely wary of attacking the bank after the previous prime minister, Liz Truss, set off economic turmoil partly because she questioned some of Britain’s independent institutions.
The Bank of England was granted independence in 1997 over how it operates, but the government sets the inflation target and appoints the governor. Mr. Bailey’s term does not expire until 2028.
But his reputation could be at risk. Public confidence in the Bank of England is at the lowest level it has been in records going back to 1999. Just 21 percent of people said they were satisfied with the way the central bank was doing its job of setting interest rates to control inflation, according to a survey published by the bank last week. The central bank’s governing body decided to commission “a broad review” last month into the institution’s forecasting and other processes.
Before the rate decision on Thursday, Andrew Goodwin, an economist at Oxford Economics, said that “markets are saying they’ve lost faith” in the bank.
The half-point increase was “an attempt to send a strong signal,” Mr. Goodwin said. But now traders are going to expect more interest rate increases and more “tough talk” until the central bank “has got on top of the inflation situation.” Mr. Goodwin predicts the bank will raise rates to 5.75 percent in the next three months.
In financial markets, traders are betting interest rates will peak just above 6 percent at the end of the year.
Even if the unexpectedly large increase in interest rates did anything to ease concerns among investors, it has stoked criticism in other corners.
Mortgage holders are increasingly worried about higher payments as more than a million households come to the end of their fixed-term agreements this year and will need to reset the interest rate on their loans. Economists at the Institute for Fiscal Studies said this week that if mortgage rates remained high, payments for 1.4 million homeowners would rise by at least a fifth of their disposable income.
The government has ruled out providing direct financial support to mortgage holders, but on Friday, Britain’s biggest lenders agreed to give people a 12-month grace period if they miss payments before repossession proceedings.
Sharon Graham, the head of Unite, one of Britain’s largest trade unions, said the interest rate increase was the wrong choice and “inflicting pain on ordinary households.”
Others agree. “I’m not convinced it was the right thing to do,” said Jagjit Chadha, the director of the National Institute of Economic and Social Research, adding that policymakers should not do any more. There is enough downward momentum from the past rate increases, he said, to get to inflation down in the next few years.
What the Bank of England needed, Mr. Chadha said, was clearer communication that inflation would take a long time to come down — partly because of factors outside its control, such as the tighter labor market, one of the results of Brexit — but that its actions would eventually work.
That clear message could have provided “comfort to households and prevented financial markets betting against the bank, which is what we’ve seen in the last week or so,” Mr. Chadha said.