The Bank of England has said it is ready to raise interest rates even higher should inflation continue to rise and stay elevated in the foreseeable future. This follows the 0.25% increase in interest rates announced by the Bank’s Monetary Policy Committee (MPC) last Thursday as it tries to combat inflation.
The Bank’s Chief Economist and Executive Director for Monetary Analysis, Huw Pill, said: “If we see greater evidence that the current high level of inflation is becoming embedded in pricing behaviour by firms, in wage-setting behaviour by firms and workers, then that will be the trigger for this more aggressive action.”
The Bank of England has said it is willing to use interest rate increases of 0.5% depending on the severity of inflation increases and their permanence.
Inflation is predicted to hit 11% in the later months of the year. This will impact households significantly as energy and food prices continue to rise. For comparison, the Bank of England works to an inflation rate target of 2%.
Economists are also saying that inflation is driving up wages as employees aim to keep up with the increasing cost of living. However, this pattern is maintaining the rate that people spend and potentially fuelling a wage-price spiral, especially as business widely admit to passing their own cost increases onto customers. Increasing interest rates will hopefully incentivise people to save money, by offering higher interest earnings on the money sitting in the bank.
As the Conservative Party continues to lose popularity in the polls, the Bank of England has received heavy criticism from cabinet ministers. In addition, the Chancellor, Rishi Sunak, has expressed the urgency of keeping inflation down.
In letters exchanged between the Chancellor and the Bank of England’s governor, Andrew Bailey, Sunak reiterated that it is imperative to bring inflation back down to the 2% target and to keep it anchored there.
Sunak wrote: “I know and expect that you and the other members of the MPC will take the action necessary to get inflation back on target and ensure inflation expectations remain firmly anchored.”
The United States is also battling steep inflation increases. On Wednesday last week, the US Federal Reserve implemented a 0.75% increase in interest rates, the most significant individual hike since 1994. There is growing concern over the inflation rate there, too, given the country’s position as the world’s biggest economy.
Insisting that the Bank of England had taken swift and appropriate action to curb high inflation rates, Pill commented: “We started earlier than some other central banks. Cumulatively, since we started (in December), we’ve done as much as other central banks have done more quickly in recent times.”