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The impact of higher inflation and interest rates

With the Office for National Statistics reporting a 12-month rate of 11.1% Consumer Price Inflation (CPI) in October 2022, as well as recent increases in interest rates, this write-up considers the impact of high inflation and interest rates on civil litigation.

Stories regarding the effect of increased interest rates have been prevalent in the news agenda in recent months. In particular, there has been widespread media coverage of rising percentages for mortgage repayments and their impact on household finance. The Bank of England raised its Bank Rate to 3% on 3 November 2022. The rate has been increased 8 times within the last 11 months. The consequence for some borrowers may be accrual or worsening of arrears, which may eventually lead to lenders taking action to recover possession of the charged properties in a larger number of cases.

The vast majority of civil disputes ultimately revolve around monetary amounts, with the most frequent remedy granted by a civil court being one of judgment for sums of money. An important aspect of any judgment is the award of interest, if any. In a large proportion of cases - especially those where there are no contractual provisions between the parties pertaining to the subject, interest is discretionary and the Court often has the power to determine whether any interest is granted, and if so, the rate and period.

If the rate of interest awarded is below the rate of inflation, the practical consequence may be that the monetary amount ordered has lost its purchasing ability more than the interest has reflected.

By way of example, a claimant who has been owed £10,000 since 1 October 2021 may obtain an order on 1 October 2022 for the judgment sum of £10,000, plus interest at 4%, in the sum of £400. Over the course of the year that the debt was outstanding, the sum has been devalued by inflation of 11.1%. Since the average price of goods and services has risen by a proportion exceeding the amount of interest awarded, in real terms the sums recovered are less valuable today than they were 1 year ago. In this instance, the award of interest has not fully offset the impact of inflation.

In the sphere of personal injury litigation, the current 16th Edition of the Judicial College 'Guidelines for the Assessment of General Damages in Personal Injury Cases' was published in April 2022. The brackets were uplifted to account for inflationary changes since November 2019, when the previous 15th Edition was published. On the one hand there is a desire for certainty and predictability for prospective claimants, so they may ascertain the approximate value of their personal injury claims; a widely-distributed set of Guidelines on which reliance is place over an extended period of time serves this objective. This goal can be achieved by only releasing new Editions sparingly.

On the other hand, since ongoing high inflation erodes the value of any award of general damages at a faster rate, this militates towards an earlier raising of the brackets by way of the publication of updated, higher Guideline figures. In other words, a higher rate of inflation means there is some incentive to release updated Editions more frequently, to keep up with rising prices.

Whether there will be a shift within civil proceedings towards awards of higher rates of interest remains to be seen.

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