Will interest rates continue to rise?

“After months of waiting, the Bank of England was finally forced off the sidelines,” Sanjay Raja, chief UK economist at Deutsche Bank, told The Times after the central bank hiked interest rates to 4%.

Conflict in the Middle East has pushed oil prices consistently above $100 a barrel in recent months, and hopes have faded that a deal could lead to a reopening of the key Strait of Hormuz. As a result, the Bank now expects UK inflation to rise to 4.9% in the middle of next year, up from the 3.2% it forecast in July.

What did the commentators say?

In his decision, the Bank’s governor, Andrew Bailey, said that “without news which softens the risks to inflationary pressures, I can see the argument for a further increase in rates”. So “the Bank looks poised to raise borrowing costs further unless a miracle takes place and price pressures simmer out”, said Maurício Alencar in City A.M.

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Following its counterparts in the US, the EU and Japan, the Bank of England is the last of the major central banks to respond to rising global oil prices with an interest rate rise this year. But think tanks that “take more of an interest in people on lower incomes”, like the New Economics Foundation, “tend to see interest rate rises as a blunt instrument in the battle against inflation”, said Will Dunn in The New Statesman.

The textbook explanation for higher rates “is that they control prices by reducing demand and promoting saving”, but when people have relatively little money to either spend or save, “this doesn’t seem particularly useful”.

It is, however, one of the few effective instruments against rising inflation. After the global oil crisis of 1973 Britain’s central bank had to use interest rates (which peaked at 17% in 1979) to prevent prices from spiralling further upwards.

Yet this “should not be seen as the start of a cycle of hikes”, said economics editor Faisal Islam on the BBC. Oil prices are already lower than they have been, reflecting “expectations or guesses that President Trump will now retreat or de-escalate from the Iran war”.

Equally “the UK economy is performing much better than forecasts and expectations”. So this isn’t the same economic uncertainty that has brought massive price rises in the past. Even the expected further rise in interest rates, probably in February next year, “is conditional on the war continuing”.

What next?

It is, “regrettably, true that we have become used to debt being artificially cheap” in the UK, said Dunn.

It could be argued that historically normal interest rates were “still a fair bit higher than they are after today’s hike”. For instance, in the 15 years prior to the 1973 oil crisis they averaged 6%. In the 15 years prior to the 2008 crash they averaged 5.5%. “The glum take on today’s hike is that this is not a temporary measure to deal with a period of inflation but a return to normal.”