Bank of England Raises Rates More Than Expected, as Inflation Persists

Last weekend, the average rate for a two-year fixed-rate mortgage hit 6 percent for the first time this year.

The extra financial burden on mortgage payers compounds the stubborn cost-of-living crisis, as inflation has outpaced pay for a year and a half. About two-thirds of adults in Britain said their cost of living had increased in June from a month earlier, and almost all of them said it was because of the higher cost of grocery shopping, according to a survey by the Office for National Statistics.

Conservative lawmakers are becoming increasingly concerned about the financial squeeze of rising mortgage rates on many of the voters whose support they need in the next election.

At talks scheduled for Friday, the government is expected to push lenders to explore all options to support people struggling with mortgages, including lengthening loan terms or changing their conditions.

There is a lot pressure on Mr. Sunak because of the growing risk that in the run-up to the next election, the government faces high interest rates, low economic growth, persistent inflation and a subdued property market. With borrowing costs rising, the government’s ability to offer tax cuts or other pre-election inducements to voters could be seriously constrained.

Two members of the Bank of England’s nine-person rate-setting committee, Swati Dhingra and Silvana Tenreyro, voted to hold interest rates flat at 4.5 percent, arguing that past rate increases were still working through the economy and the bank was at risk of tightening policy more than necessary. They also said forward-looking indicators suggested that inflation and wage growth would fall significantly.

But they were outvoted by the seven other members, who were concerned that the impact on domestic prices and wages from external shocks, such as the war in Ukraine, would take longer to fade than they did to emerge. They predicted that lower wholesale energy prices would bring down the headline rate of inflation later in the year, but that services inflation, which is dominated by companies’ wage costs and reflect domestic price pressures, would be “broadly unchanged” in the short term.

As prices in Britain have continued to rise faster than expected, and faster than in the United States and Western Europe, the Bank of England has come under increasing scrutiny. Last month, the central bank’s governing body decided to commission “a broad review” into the institution’s “forecasting and related processes during times of significant uncertainty.”

Stephen Castle contributed reporting.