The Bank of England has imposed a series of interest rate hikes since last December, with a spate of 0.25% increases followed by a more significant 0.5% hike. This is in a bid to bring down inflation, which has soared to its highest level in decades.
The interest rate in the UK now stands at 1.75% as a result of these increases. However, one Bank of England official has suggested that rates may need to rise more quickly and forcefully to avoid a long-term squeeze on the economy.
Earlier this week, BoE policymaker Catherine Mann said the bank needs to be prepared to take even more aggressive action with interest rates to tackle inflation. She said the gradual approach the bank had taken over recent months had not tempered the public’s price expectations, which has a significant impact on medium-term inflation.
Mann stated: “The gradual pace of increase in Bank Rate has not tempered expectations enough. A fast and forceful monetary tightening, potentially followed by a hold or reversal, is superior to the gradualist approach.”
Pushing for more significant rate increases
Mann has been pushing for more significant increases for months, having voted for a 0.5% hike back in February. However, the central bank kept the rate increases consistent at 25 basis points until the last one.
The bank has said, however, that it is prepared to act more forcefully if the need arises. Mann was asked whether the central bank should consider a super-sized 0.75% rate hike in September, and she said this was ‘an important question’.
The BoE’s most recent 0.5% hike was the first 50 basis point increase since 1995. If the base rate increases by 0.75% this month, it will be the most significant increase since 1989. According to the financial markets, there is an 85% chance that the central bank could increase the rate by 0.75% at the next Monetary Policy Committee meeting on September 15th.
There are already concerns over how households will manage financially with soaring living costs and rocketing energy prices. Increased interest rates could add to the financial strain for millions of households with variable-rate mortgages.
Liz Truss was confirmed as the new UK Prime Minister earlier this week and has already promised more support toward energy bills to help keep costs down for UK households until at least early next year.
Referring to the current situation with energy prices, Mann said: “If current wholesale energy prices are allowed to be passed on to households and firms, this will lead to enormous pain for millions of people over the winter months.”