Andrew Bailey signals the end of the rate hike cycle but hints at possible further increases

Bank of England Governor Andrew Bailey has suggested that interest rates are nearing their peak, though he indicated they might still increase further in the near future.

Addressing MPs, Bailey stated, “We are much closer now to the top of the cycle” of interest rate hikes. The Bank has implemented 14 consecutive rate increases in an effort to curb inflation, which remains the fastest among major global economies.

It is anticipated that borrowing costs will rise again later this month, with the Bank rate expected to reach 5.5%. The rationale behind raising rates is to make borrowing more expensive, which discourages spending, reduces demand, and ultimately slows inflation—the rate at which prices increase.

However, despite the Bank rate being at its highest point in 15 years, inflation has been persistently high. While inflation dropped to 6.8% in the year to July, down from 7.9% in June, it is still far from the government’s target of 2%.

During a discussion with the Treasury Select Committee, Bailey acknowledged signs that inflation might be slowing, although it remains uncertain to what extent this will affect wage growth, which has recently reached record levels. Since wage growth can contribute to inflation, this remains a key concern for the Bank.

“Many of the indicators are now behaving as expected, signalling that inflation will continue to decline, and I believe it will be quite a noticeable decrease by the year’s end,” Bailey commented. He continued, “The critical question is whether inflation expectations will continue to drop as headline inflation falls, and whether that shift will be reflected in wage negotiations.”

Meanwhile, despite the cooling economic activity due to higher borrowing costs, wages have continued to rise at a rapid pace, drawing attention from the Bank.

Bailey’s statements suggest that the upcoming rate hikes may be smaller than the market anticipated, though he reiterated that the Bank’s decision-making, scheduled for 21 September, will rely on the latest data regarding jobs, growth, wages, and inflation.

He also reaffirmed that interest rates could remain elevated for some time, a sentiment he had expressed previously.

The rise in interest rates has already affected more than half of mortgage holders, with many more set to feel the squeeze as their fixed-rate deals come to an end in the coming months. These borrowers could face significant increases in their monthly repayments.

Inflation and Wage Hikes Pose Financial Strain for Small Business Owners

Lee Howard, who transitioned from being a painter and decorator to the owner of Forty Six Coffee Shop in Neath, has revealed the growing difficulty in keeping prices reasonable for customers amidst rising operational costs. Alongside his wife, Guiliana, he has been running the coffee shop for a decade, but escalating prices, particularly due to the recent wage increases, have put considerable strain on their business.

Although inflation has slowed since reaching a 40-year high in 2022, it continues to exceed the Bank of England’s target of 2%. On Thursday, the central bank maintained interest rates at 5.25%, a level not seen in 16 years, further increasing the financial pressure on both businesses and individuals.

“In April, we had to raise wages by 10%,” Mr Howard explained. “When you add that on top of everything else, it becomes the toughest challenge to absorb.”

One of the key factors influencing the Bank of England’s decision-making is the recent increase in the National Living Wage, which rose from £10.42 to £11.44 per hour. While this wage hike is beneficial to employees, it presents a significant challenge for businesses in terms of absorbing the increased labour costs, especially when customer prices are already under pressure due to inflation.

A staff member, Oliver Altissimo, a 23-year-old university student studying computer game design, shared how rising costs have affected him. Although he lives with his grandfather to reduce living expenses, the overall financial pressure remains high.

Among the café’s regular customers, concerns about rising prices are widespread. Adriana, who lost her teaching job during the pandemic, expressed frustration over constant price hikes. “Things are going up all the time,” she said. Anne, a retired teacher, echoed her sentiments, pointing out that even modest increases in price make a difference.

Despite the mounting pressures, Mr Howard has been able to retain a loyal customer base. However, he noted that younger patrons, particularly those struggling to get on the housing ladder or manage mortgage repayments, are now visiting less frequently, opting for visits every other week rather than weekly.