Top official claims high interest rates will be temporary -
interest rate

Top official claims high interest rates will be temporary

The Governor of the Bank of England, Andrew Bailey, has claimed that low interest rates will return to the UK once the impact of the Covid-19 pandemic and the Russian war against Ukraine start to fade.

He suggested that the central bank would have to act aggressively in the short term to increase interest rates to bring down soaring inflation. However, he added that global drivers of lower interest rates had not gone away and that the effects of the pandemic and the war did not mean that interest rates would increase permanently.

The BoE Governor stated: “Cyclical adjustments in short-term nominal interest rates – like those we are currently witnessing in the United Kingdom and abroad – will for the foreseeable future continue to be played out against the backdrop of low global equilibrium real interest rates.”

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inflation uk

Short-term challenges continue

While Mr Bailey believes that low interest rates will return and inflation will come down over time, the short-term challenges for households across the UK continue.

In May, price rises surged to 9.1% due to post-Covid demand, problems with supply chains, and the war. The bank’s inflation target is 2%, so it has already rocketed way beyond this. As a result, interest rates have increased from 0.1% in December 2021 to 1.25% as of June 2022, with a series of 0.25% increases.

In addition, many expect the central bank to increase rates by even more in August, with some economists expecting a more aggressive 0.5% rate increase. This will put increased financial pressure on homeowners with variable-rate mortgages and those whose fixed-rate deals are due to end. It will also significantly impact those trying to purchase a home by taking out a mortgage.

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Too soon to tell the impact of the pandemic

Over recent years, various factors have helped drive interest rates down, including increased life spans that have resulted in people saving more money toward retirement. Mr Bailey said that this was a trend expected to continue.

short-term challenges

Some economists have expressed concerns that the pandemic has negatively impacted some of the globalisation that helped keep inflation low, which meant that interest rates remained low. However, there is no clear indication that this is the case.

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Addressing the Official Monetary and Financial Institutions Forum, Mr Bailey said: “It is too soon to tell what the long-run impact of the pandemic will be for the economy. It is worth bearing in mind that, while the pandemic was a large and unprecedented economic shock, with profound changes to labour markets and the way we work, it is possible that its long-run effects on productivity will be small.”

While the Governor did not indicate whether the next rate increase would be bigger, he did state that the Monetary Policy Committee would take any necessary steps to bring inflation back down to the target of 2%.

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