Inflation and the Impact of Government Borrowing on Interest Rates

Local independent financial adviser, Ben Morris of Morris Financial Management, looks at why inflation is still rife and the impact of Government borrowing on interest rates:
Inflation is still high and UK wages have risen at their fastest rate in 20 years, raising expectations that UK interest rates will have to rise.
Regular pay excluding bonuses increased by 7.2% in the three months to April, although it still lags behind inflation – the rate at which prices rise – currently at 8.7%.
The Bank of England has warned big pay rises are contributing to the UK’s still high rates of inflation.
It has put up interest rates 12 times since 2021 in an effort to slow price rises.
Higher interest rates may be good for savers, but this drives up repayment costs for millions of mortgage holders.
And fears the Bank of England will raise interest rates higher than previously thought – from their current 4.5% to as high as 5.5% – have been causing turbulence in the mortgage market.
And, the government’s borrowing costs – which directly impact on mortgage rates – rose to their highest rate since last year’s mini-budget.
After the release of the wage data, two-year gilt yields – the interest rate on UK government borrowing – increased by more than 0.2 percentage points to hit almost 4.9%. Yields are also the highest since the 2008 financial crisis, hiking the cost of government borrowing.
As a result, the Bank of England is widely expected to increase rates by at least a quarter point from the current level of 4.5% at the next meeting of its monetary policy committee on 22 June.
A further rise in borrowing costs would add to the pressure on households, with figures from the Resolution Foundation showing about 1.6 million mortgage holders will come to the end of cheaper fixed-rate deals at the end of this year, adding about £2,300 to a typical borrower’s annual repayments.
For savers and investors, the news is a little more positive.
An independent financial adviser is best placed to evaluate each individual situation. For more information contact Ben Morris on 01745 798260 or email

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