As the inflation crisis in the UK has deepened, the Bank of England has been forced to act decisively by hiking interest rates. In December 2021, interest rates stood at 0.1 percent, but they\u2019ve since been raised six times and now stand at 1.75 percent. So the question on everyone\u2019s lips right now is just how high could they go?<\/p>\n
Many analysts, commentators and stakeholders are already predicting a further increase in August, and more in the following months. For example, Michael Saunders, a member of the Bank of England\u2019s Monetary Policy Committee (MPC), believes interest rates could potentially reach at least two per cent in the coming months.<\/p>\n
In a speech at the Resolution Foundation think tank, he was reluctant to commit to a precise forecast for the bank rate over the next year, but said the tightening of monetary policy \u201cmay still have some way to go\u201d. Mr Saunders said the MPC must balance the risks and costs of tightening \u201ctoo much, too soon\u201d against \u201ctoo little, too late\u201d, but argued that the cost of not tightening promptly enough would be \u201crelatively high at present\u201d.<\/p>\n
\u201cWith excess demand and elevated inflation, \u2018too little, too late\u2019 would increase the likelihood that recent trends in underlying pay growth, longer-term inflation expectations and firms\u2019 pricing strategies become more firmly embedded,\u201d he commented.<\/p>\n
However, Mr Saunders said that \u201cif the Committee tightens \u2018too much, too soon\u2019 and then finds the economy and inflation pressures are much weaker than expected, the policy outlook could adjust (if needed) and inflation expectations would probably be better anchored than now\u201d. He went on to note that there are signs economic activity in the UK is slowing, as people\u2019s incomes and spending are being eroded by rising inflation.<\/p>\n
But Mr Saunders stressed that this slowdown must be considered against the fact that the economy was in \u201cexcess demand\u201d earlier this year, while \u201cpotential growth is low, recruitment difficulties are elevated, and there is a sizeable backlog of unmet labour demand\u201d.<\/p>\n
Whereas most MPC members have voted for 0.25 percent increases in interest rates over the last few months, Mr Saunders has actually advocated going further, supporting hikes of 0.5 percentage points twice this year, and he agreed with the decision to raise rates to 1.5 percent in June.<\/p>\n
Will the Bank of England remain independent?<\/p>\n
The debate over how far interest rates will go up was made even more interesting thanks to comments from one of the Conservative party leadership contenders.<\/p>\n
The Bank of England was granted operational independence over monetary policy after Tony Blair\u2019s Labour government was elected in 1997. But Foreign Secretary Liz Truss recently suggested it should be the government that sets a \u201cclear direction of travel\u201d for monetary policy.<\/p>\n
Responding to the comments, Mr Saunders said there will always be a debate about whether interest rates will go up or down. However, he said that \u201cthe foundations of the UK monetary policy framework are really important and best left untouched\u201d.<\/p>\n
Whether questions over the Bank of England\u2019s independence could become more of an issue to the government in the coming months remains to be seen, but it would add a fascinating new dimension to the debate on how to tackle the inflation crisis.<\/p>\n","protected":false},"excerpt":{"rendered":"
As the inflation crisis in the UK has deepened, the Bank of England has been forced to act decisively by hiking interest rates. In December 2021, interest rates stood at 0.1 percent, but they\u2019ve since been raised six times and now stand at 1.75 percent. So the question on everyone\u2019s lips right now is just how high could they go? Many analysts, commentators and stakeholders are already predicting a…<\/p>\n