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source: AI

LONDON (AP) — People who borrow money in the UK should prepare for higher loan costs as new data released on Wednesday shows that inflation did not decrease as expected in May.

The Office for National Statistics reported that consumer prices remained at a high level, with an annual inflation rate of 8.7% in May. Experts had predicted a slight drop to 8.4%. This news is likely to lead the Bank of England to raise interest rates again on Thursday.

The increase in inflation was driven by higher prices for flights, recreational activities, cultural goods and services, and used cars. However, the cost of gasoline at the pump had a downward effect on inflation.

Grant Fitzner, the chief economist at the Office for National Statistics, stated that although inflation was relatively stable in May following a decline the previous month, it remained historically high.

Financial markets believe that the Bank of England will raise its benchmark interest rate from the current 15-year high of 4.5% to 4.7% on Thursday. Some economists even think the bank may raise it to 5%. Increasing interest rates helps to reduce inflation by making borrowing more expensive for households and businesses, which may result in reduced spending and less pressure on prices.

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Debapratim De, a senior economist at Deloitte, said, “This almost guarantees that the Bank of England will raise interest rates this week and significantly increases the likelihood of further increases throughout the fall.”

This expected rate hike will put additional pressure on financial institutions to raise their own lending rates for loans and mortgages.

Many homeowners will be shielded from these recent increases as they locked in their mortgage rates at very low levels during the COVID-19 pandemic. However, those whose fixed-rate terms expire in the coming months will face much higher borrowing costs when they seek new mortgage deals.

Jamie Elvin, director at mortgage broker Strive Mortgages, described it as a “ticking time bomb” for 1.4 million borrowers whose low fixed rates will end this year.

Unlike in the United States, where many homeowners secure mortgage rates for 30 years, it is common in the UK to fix rates for shorter periods. After the fixed term ends, borrowers typically move to their lender’s higher variable rate or search for other deals. In the current economic climate, those who locked in rates below 1% three years ago may face a fivefold increase in their rates.

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Like other central banks, the Bank of England has been raising interest rates aggressively over the past year and a half due to surging inflation caused by pandemic-related supply chain issues and Russia’s invasion of Ukraine, which drove up energy and food prices.

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