Stubborn inflation is putting the British central bank under pressure. In May, inflation in the UK did not fall further, to the surprise of analysts. Core inflation excluding volatile energy, food and beverage prices actually rose. Compared to the same month last year, consumer prices increased by a total of 8.7 percent, as in April, according to the ONS statistics office in London. Economists had expected a drop to 8.4 percent. The cost of living rose by 0.7 percent month-on-month. That’s more than expected.
Core inflation rose surprisingly from 6.8 to 7.1 percent. Economists had expected an unchanged value. May is the highest rate since March 1992. Experts regard core inflation as the more reliable indicator when it comes to the fundamental price trend. Many central banks, including the British central bank, are currently paying particular attention to the value.
The central bank will announce new decisions after its monetary policy meeting this Thursday. At least an additional key interest rate hike of 0.25 percentage points is expected. However, a larger step of 0.50 points is not ruled out.
Key interest rates at the highest level since the financial crisis
The key interest rates in Great Britain are already at their highest level since the 2008 financial crisis. Since the end of 2021, the central bank has raised them from almost zero to 4.5 percent. It is one of the most severe tightening processes that the British economy has ever had to cope with. The background is the sharp increase in inflation, which is mainly due to the Russian war against Ukraine.
The pound initially reacted to the inflation figures with exchange rate gains against the euro and the dollar. However, the British currency came under pressure as trading progressed. Fears of stagflation were cited as the reason on the market, i.e. the fear of a stagnating economy coupled with high inflation. The economy is already feeling the headwind of the sharp interest rate hikes. A major issue is the sharp rise in mortgage interest rates, which are making home construction financing considerably more expensive.
The British national debt has also continued to rise. At the end of May, a debt ratio of more than 100 percent of economic output (GDP) was marked for the first time in 62 years, as the statistics office announced. In absolute terms, according to the ONS, the debt level was almost 2.6 trillion pounds (around 3 trillion euros).
The development is putting Prime Minister Rishi Sunak’s government under pressure from two sides: Sunak has not only promised to do something about the sharp rise in the cost of living. The prime minister also wants to put public finances in order.
