Borrowers have been warned to brace for Bank of England interest rates above 5% before the end of the year, after an unrelenting rise in the cost of food meant UK inflation dropped by less than expected last month.
Raising the prospect of additional financial pain for millions of borrowers and mortgage holders across Britain, economists warned the UK economy was facing stubbornly high levels of inflation that would draw an almost guaranteed reaction from the central bank.
Wednesday’s figures cast further doubt on Rishi Sunak’s target to halve the rate of inflation before the end, in a development which could further pressure the prime minister before the next election.
The Office for National Statistics reported that inflation, as measured by the consumer prices index, fell to 8.7% in April, down from 10.1% in March, as it dipped below double figures for the first time since last summer. The rate had peaked at 11.1% in October.
However, the figure was higher than predictions made by Threadneedle Street two weeks ago, prompting a sharp sell off on the London stock market on Wednesday and driving up UK government borrowing costs close to the level during Liz Truss’ ill-fated premiership.
Financial markets moved to bet it was almost a certainty that the Bank would increase the base interest rate by a quarter-point from the current level of 4.5% when its policymakers next meet in June – with the prospect of borrowing costs reaching almost 5.5% before the end of the year.
Should rates hit that level, a borrower with a £200,000 mortgage on a tracker would see their annual repayments jump by about £1,400 from current levels. “That would add to the pain that the past year and a half has already wrought,” said Sarah Coles, head of personal finance at Hargreaves Lansdown.
“For anyone with a fixed rate mortgage due to expire in the next few months, this is incredibly unwelcome news, and the longer that higher rates endure, the more people will find themselves facing far higher mortgage rates, and no idea how to cover the cost.”
The latest snapshot from the ONS reflected a steadying in energy prices, which remain high but have not risen further compared with last year.
However, this was offset by the rising cost of a weekly shop as food and non-alcoholic drink prices soared by 19% in the 12 months to April, the fastest annual rate since 1977 and the highest level in western Europe.
Prices rose by more than a quarter for several basic essentials, including pasta, milk, cheese, eggs and olive oil. Although food prices have increased across the EU in recent months, academics at the London School of Economics (LSE) said in a study released on Wednesday that Brexit was adding to the financial pain in Britain.
The LSE’s latest report estimating the impact of leaving the bloc on UK food prices found that trade barriers were consistently hampering imports, pushing up bills by an average £250 a year since 2019.
Official figures also showed a sharp increase in the cost of telecommunications services – linked to inflation-busting price increases pushed through by mobile phone and broadband providers in April.
Charities and anti-poverty campaigners warned that a fall in the headline inflation rate would not automatically spell an improvement in living standards for hard-pressed households, as the cost of basic essentials remained stubbornly high.
It comes as the energy regulator Ofgem is poised to announce a lower cap on energy bills on Thursday, with the average gas and electricity bill expected to fall from £2,500 a year under the government’s energy price guarantee to just over £2,053. However, the figure remains almost double the level before Russia began restricting gas flows to Europe.
Rachel Reeves, the shadow chancellor, said: “As bills keep surging, families will be worried food prices and the cost of other essentials are still increasing.
“They will be asking why this Tory government still refuses to properly tackle this cost of living crisis, and why they won’t bring in a proper windfall tax on the enormous profits of oil and gas giants.”
Andrew Bailey, the Bank governor, said the government could still meet the target of halving inflation, although he appeared to suggest at an event hosted by the Wall Street Journal in London that it was too soon to be certain. “I think we’re going to have to see how the news and the evidence unfolds,” he said.
Speaking after the release of the inflation figures, Bailey said the central bank’s “commitment is absolute” to tackle the rising cost of living. “I have to say it [inflation] is taking longer, and it is higher that was expected certainly earlier this year,” he added.
Jeremy Hunt, the chancellor, said the government had this week received a stamp of approval from the International Monetary Fund (IMF) for its approach.
“The IMF said yesterday we’ve acted decisively to tackle inflation but although it is positive that it is now in single digits, food prices are still rising too fast,” he said.
