- By Dearbail Jordan & Michael Race
- Business Reporter, BBC News
11 May 2023 12:01 BST
Updated 41 minutes ago
Image source: Getty Images
Rising food prices mean prices will stay high for longer, warned the Bank of England, which has hiked interest rates for the 12th consecutive month.
In a fight against inflation, interest rates were raised from 4.25% to 4.5% – the highest level in almost 15 years.
“It takes longer for food prices [falls] get through,” bank boss Andrew Bailey told the BBC.
However, Mr Bailey was more optimistic about the UK economy’s rapid growth and said a recession could now be avoided.
The bank quickly hiked interest rates to try to stem the sharp rise in the cost of living.
Some have wondered why a global drop in wholesale food prices has not resulted in price falls in UK supermarkets.
But Mr Bailey said he didn’t think supermarkets and other grocers were charging their customers more than they should.
“It actually doesn’t look like that’s going to happen,” he told the BBC, adding that higher energy prices and the war in Ukraine have made importing some groceries more difficult and leading to higher costs for retailers.
“Energy is a pretty big factor in the cost of food production and that has certainly had an impact during this crisis. Producers often bought in supplies at high prices because they were worried they wouldn’t be able to get the things they needed.”
“But, as I said, we are in very unusual times.”
He said grocers told him they expect food inflation to fall “rather quickly” for the rest of the year.
On Thursday, the Treasury met with representatives from all major UK supermarkets to discuss food prices.
The bank now expects headline inflation – the rate at which prices are rising – to ease to 5% by the end of this year, up from the 4% previously forecast.
The rise in interest rates will mean higher mortgage, credit card and loan payments for some people, but the rise in interest rates could benefit savers.
By raising interest rates, the bank expects people to have less money to spend and fewer things to buy, which should help keep prices from rising as quickly.
However, it is also becoming more difficult for companies to borrow and expand.
According to the bank, around 85% of all mortgages are fixed rate mortgages and around 1.3 million households are expected to reach the end of their mortgage contracts this year and face an increase of up to £200 a month based on current interest rates .
Compared to before December 2021, before interest rates started to rise, a typical tracker mortgage customer is paying around £417 more per month and adjustable rate mortgage holders are paying around £266 more.
Mr Bailey said that while any inflation is difficult, rising food prices hit those on lower incomes harder as they spend a higher proportion of their money on food. “We are very, very aware that all inflation is difficult and especially for those who are least well off.”
The bank’s chief economist Huw Pill recently sparked a backlash when he said people in the UK must accept that they would be worse off.
Mr Bailey said: “I don’t think Huw’s choice of words was the right choice… to be honest and I think he would agree with me.”
Better growth
Separately, the Bank of England took a more upbeat view of the outlook for the economy over the next few months – a stark contrast to its forecast six months ago, when it said Britain was heading into its deepest recession on record.
According to the bank, “modest but positive growth” can now be expected.
Factoring out the impact of the strikes and the extra bank holiday to mark King Charles’ coronation, the economy will have grown 0.2% in both the first three months of the year and between April and June, the bank forecasts.
Falling energy prices, as well as measures to support businesses and households announced in last month’s budget, have prompted the bank to revise its forecasts.
Chancellor Jeremy Hunt said that while it was “good news” that a recession was no longer predicted, the rise in interest rates was “obviously very disappointing for families with mortgages”.
“But if we don’t fight rising prices, the cost-of-living crisis will only continue,” he added.
Labour’s shadow chancellor, Rachel Reeves, has said the rise will ‘stricken people with fear’.
Helen Parry, who works for DC Fruit and Veg in Stoke-on-Trent, said she saw changes in her customers’ choices and how they avoided treating themselves later in the month.
“They come, they do their shopping, they get what they need, and it slows down a bit as the month progresses until their next payday,” she said.
How can I save money on my grocery shopping?
- Keep track of what you have
- First go to the reduced section
- Make better use of your freezer
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