After an extra large rate hike, the Bank of England’s critics are multiplying

“Mortgage woes for millions.” “Rate hike nightmare.” These were just two of the grim headlines UK front pages aimed at the Bank of England on Friday, the day after it announced a surprisingly large rate hike.

With inflation remaining high, officials at the country’s central bank acted more forcefully than expected on Thursday, raising interest rates by half a point to 5 percent, the highest level in 15 years.

“We know this is hard,” said central bank governor Andrew Bailey, who acknowledged that people with mortgages and other loans would be concerned about the impact of the change on their finances. “But if we don’t raise rates now, things could get worse later,” he added.

The central bank had already raised interest rates 12 times since December 2021, and yet UK inflation remained stuck at 8.7 percent in May, the same as the month before. It is more than double the rate in the United States and notably higher than inflation in Britain’s neighbors in Western Europe.

The pressure is mounting on mr. Bailey to explain why Britain appears to be worse off and to prove that the bank has the inflation problem under control. “Apologies, apologies,” London newspaper The Times mocked in an editorial this week, arguing that Mr Bailey’s “alibis are wearing out”.

Even as criticism of the bank’s underestimation of price growth has increased, it is unlikely that Mr. Bailey is in danger. Prime Minister Rishi Sunak and his chancellor, Jeremy Hunt, have said they support the bank’s efforts. Both are likely wary of attacking the bank after the previous prime minister, Liz Truss, caused economic turmoil, in part because she questioned some of Britain’s independent institutions.

The Bank of England gained independence over its operation in 1997, but the government sets the inflation target and appoints the governor. Mr. Bailey’s term does not expire until 2028.

But his reputation may be in jeopardy. Public confidence in the Bank of England is at its lowest level since 1999. Only 21 per cent of people said they were satisfied with the way the central bank was doing its job of setting interest rates to control inflation to hold. according to a study published by the bank last week. The central bank’s governing body decided last month to order a “broad overhaul” of the institution’s forecasting and other processes.

Ahead of Thursday’s interest rate decision, Andrew Goodwin, an economist at Oxford Economics, said “markets say they have lost confidence in the bank”.

The half-point increase was “an attempt to send a strong signal,” Mr Goodwin said. But now traders expect more rate hikes and more “talking loudly” until the central bank “gets the inflation situation under control.” Mr Goodwin predicts that the bank will raise interest rates to 5.75 percent over the next three months.

In the financial markets, traders are betting that interest rates will be just above 6 percent by the end of the year.

While the unexpectedly sharp rise in interest rates did something to allay investor concerns, it has fueled criticism from other quarters.

Mortgage holders are increasingly concerned about higher payments as more than a million households come to the end of their fixed-term contracts this year and must review interest rates on their loans. Economists at the Institute of Fiscal Studies said this week that if mortgage rates remained high, payments for 1.4 million homeowners would increase by at least a fifth of their disposable income.

The government has ruled out providing direct financial support to mortgage holders, but on Friday Britain’s biggest lenders agreed to give people a 12-month grace period if they fail to make payments before repossession takes place.

Sharon Graham, the head of Unite, one of Britain’s largest unions, said the rate hike was the wrong choice and “inflicted suffering on ordinary households”.

Others agree. “I’m not convinced this was the right thing to do,” said Jagjit Chadha, the director of the National Institute of Economic and Social Research, adding that policymakers should do nothing more. He believes there is enough downward momentum from recent interest rate hikes to bring inflation down in the coming years.

What the Bank of England needed, Mr Chadha said, was clearer communication that inflation would take a long time to fall – partly because of factors beyond its control, such as the tighter labor market, one of the results of Brexit – but that its actions would eventually work.

That clear message could have “comforted families and prevented financial markets from betting against the bank, as we have seen over the past week,” said Mr. Chadha.