How are interest rates and inflation linked?

However, high interest rates do cause problems for consumers, with people spending and borrowing less, and the Bank of England acknowledges that. Their logic is that by raising interest rates this will reduce down the amount that individuals and companies borrow, which in turn reduces down the demand for goods and services, meaning that companies will have to charge less for their goods and services.

The Bank of England also concedes that raising interest rates has compounded many of the issues caused by soaring inflation and the cost-of-living crisis. However, it insists that if it doesn’t act now, the high rates of inflation we’re currently experiencing will last even longer, which would make everyone worse off in the long run. “In the end, we would need even higher interest rates to bring inflation back down to the two percent target later on,” the Bank of England argues.

Interest rates have been gradually increasing since the end of last year, as the Bank of England was confident that the end of the furlough scheme hadn’t generated the widespread job losses it had feared. But it could not have anticipated Russia’s invasion of Ukraine and its subsequent impact on gas prices, something which raising interest rates couldn’t have prevented.

As the Bank of England says: “Our job is to react to unexpected events, and make sure that inflation comes back to the two percent target, not to pretend that we can predict them.” They will have to make further difficult decisions over the coming months in order to get inflation in check, but they are left with very few options now.

If you need advice and support on how to manage your money during this volatile period, please don’t hesitate to get in touch with us. We’re here to provide the guidance and information you need, so you can be confident you’re taking the right steps to make your money work hard for you.