The Bank of England is expected to raise interest rates again this week, for a twelfth time in under two years.

Why?

The UK government is trying to use contractionary monetary policy to tackle rising inflation. The tool they are using is the bank rate. The Bank Rate determines the interest rate the Bank of England pays to commercial banks. It therefore influences the rates those banks charge people to borrow money or pay on their savings. The Bank’s interest rate, sometimes called the Bank of England base rate, or simply the bank rate, is set by the Monetary Policy Committee, which meets eight times per year.

The group will meet again this week, with its decision published at 12pm on Thursday 11 May.

Will it solve the problem?

In my opinion, no. From what I can see, what we are experiencing in the UK at the moment is cost-push, not demand-pull inflation. A small yet significant piece of evidence I can give to those reading is a study by the financial times , which shows that almost 40% of 35-44 year olds in the UK have been forced to borrow simply just to make ends meet, amongst other groups. This can be seen in the chart below:

The chart above shows that borrowing amongst all age groups has increased, simply to buy the basic necessities of life, supporting the argument that what we are experiencing is not the result of frivolous consumer spending. What is particularly worrying, is that individuals who are nearing retirement age and should be enjoying their years of hard work, are actually increasing their debt! As well as the 18-24 year olds; many of whom have only just started their careers.

So if an increase in interest rates means in increase in the cost borrowing, what will another increase in interest rates mean for these groups and the economy as a whole?

• It may force individuals into unregulated or unaffordable sources of credit.
• It may simply just increase the cost of borrowing which will make those who are currently relying on credit, poorer in the future, as well as all of the related stress and mental health issues that come with it.
• For many, the cost of borrowing will simply be too high and they will be forced to find other ways to reduce their costs, or increase their incomes .This also has a negative multiplier effect, as the cost of borrowing increases caused by an increase in interest rates, people will borrow less, as a result, spending in the economy will decrease, as spending decreases firms revenue will decrease, consequently businesses will suffer ( many of whom are only now recovering from the effects of the pandemic and rising production costs) , as businesses generate less revenue less money is available to spend on research and development ( which decreases our country’s productivity) , less money is available to spend on training employees and in some cases may result in unemployment, further fuelling the negative effects of an increase in interest rates. 

The real question here is, what can/will the UK government do to tackle the root cause of our inflationary pressure? I will make a post in the coming days to identify and discuss the biggest factors contributing to our current inflation rate, and what options are available to tackle them.