- Written by Darbel Jordan and Michael Reese
- Business Journalists, BBC News
Rising food costs mean prices will remain high for longer, the Bank of England warned, as it raised interest rates for the 12th consecutive time.
Interest rates were raised to 4.5% from 4.25% – the highest in 15 years – in the battle to slow inflation.
“It takes longer to price food [falls] Bank chief Andrew Bailey told the BBC.
But Bailey was more optimistic about the speed at which the British economy would grow, saying it would now avoid a recession.
The bank has made rapid rates to try to slow the sharp rise in the cost of living.
Some have questioned why lower global wholesale food prices have not led to lower prices charged by supermarkets in the UK.
Still, Bailey said he doesn’t think supermarkets and other grocery stores are charging customers more than they should.
“It doesn’t seem like it’s really happening,” he told the BBC, adding that high energy prices and the war in Ukraine made it difficult to import some foods and drove up costs for retailers.
“Energy is a very big component of the cost of food production and that certainly has had an impact in this crisis. Producers often bought futures (supplies) at high prices because they were worried about whether they would get the things they needed.
“But, as we’ve said before, we are in very unusual times.”
He said groceries have told him they expect food inflation to drop “very quickly” for the remainder of the year.
On Thursday, the Treasury met with representatives from all of the UK’s major supermarkets to discuss food prices.
The bank now expects headline inflation – the rate at which prices rise – to fall to 5% by the end of this year, up from the 4% previously forecast.
An increase in interest rates will mean higher mortgage, credit card and loan payments for some people, but higher interest rates may benefit savers.
By raising interest rates, the bank expects people to have less money to spend and buy fewer things, which should help stop prices from rising quickly.
However, it makes it difficult for companies to borrow money and expand.
About 85% of all mortgages are fixed rate, according to the bank, and around 1.3m households are expected to reach the end of their deals this year and face hikes of up to £200 a month, based on current rates.
Compared to pre-December 2021 before interest rates started to rise, a typical tracker mortgage customer would pay around £417 more per month, and variable rate mortgage holders would pay around £266.
Bailey said that while inflation has been difficult, higher food prices hit lower-income people harder because they spend a higher percentage of their money on food. “We are well aware that all inflation is hard, especially for the less well-off.”
The bank’s chief economist, Howe Bell, recently sparked a backlash when he said people in the UK needed to accept that they would be worse off.
“I don’t think Huw’s choice of words was the right one… to be honest I think he would agree with me,” said Mr. Bailey.
better growth
Separately, the Bank of England was more positive about the outlook for the economy over the next few months – in stark contrast to its forecast six months ago when it said the UK would enter the longest recession on record.
According to the bank, “modest but positive growth” is now expected.
When you remove the effects of strikes and an extra bank holiday for King Charles’ coronation, the economy will have grown by 0.2% in each of the first three months of the year and between April and June, the bank expects.
Lower energy prices as well as measures to help businesses and households announced in the budget last month caused the bank to change its forecasts.
Chancellor Jeremy Hunt said that while it was “good news” that a recession was no longer expected, the rise in interest rates was “obviously very disappointing for families with mortgages”.
“But unless we address the high prices, the cost of living crisis will continue,” he added.
Labour’s shadow chancellor, Rachel Reeves, said the increase would leave people “in a state of anxiety”.
Helen Barry, who works at DC Fruit and Veg in Stoke-on-Trent, said she had noticed changes in her clients’ choices and how they were avoiding treating themselves later in the month.
“They come in, they do their shopping, they get what they need, and as the month gets closer to the next payday, it slows down a bit,” she said.
How can I save money at my food store?
- Keep track of what you have
- Head to the mini section first
- Make better use of your freezer
What are your questions about the latest inflation news? How effective will you be? Contact by e-mail [email protected].
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