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Explainer-Why is the Bank of England talking about raising rates? By Reuters

© Reuters. FILE PHOTO – A shadow is cast by a nearby building across the Bank of England, City of London (Britain), December 12, 2017. REUTERS/Clodagh Kilcoyne

LONDON, (Reuters) – The Bank of England is under pressure to take action as inflation reaches double the 2% target. It appears that the Bank of England will be raising interest rates for the first time since the outbreak of coronavirus.

In an interview, Governor Andrew Bailey stated that inflation exceeding target should be controlled to stop it becoming permanent embedded.

Michael Saunders from the Monetary Policy Committee, another member of which said that it was appropriate for markets to have started pricing in rate increases much earlier than usual.

Below are some questions to ask about interest rates in the country’s fifth-largest economy.


The BoE is expected to raise the benchmark Bank Rate by 0.1% from its record-low of 0.1% at its November 4 meeting. This would be ahead of the U.S. peers in the euro zone and the BoE following the lead of New Zealand and Norway’s central banks.

In 2022, the financial markets expect at least two more increases.

Some economists worry about Britain’s slowing economy and its ability to meet post-lockdown staffing shortages. However, they believe the BoE may have to ease up on policy gradually.

Why is there talk of higher interest rates?

Although Britain is not alone in its supply chain woes, rising energy prices, labour shortages, and other problems with the rest of the world, many investors see Britain as an especially vulnerable country to inflation and high policy rates. Brexit has only exacerbated the problem.

Britain’s shortage of oil has left it vulnerable to skyrocketing wholesale costs. A deficiency of truckers caused fuel pump problems across the nation.

According to the BoE, consumer price inflation is expected to rise by 4% in the next year. Fuel prices and household energy cost have also risen since last month.

Huw Pill is the BoE’s chief economist. He expressed concern that inflation might prove less temporary than they had anticipated.

GRAPHIC-UK inflation on track to hit double BoE’s 2% target


It is not. According to Governor Bailey, the BoE cannot address supply chain issues that have led to inflation. The BoE is also unable to control the energy price.

Officials at BoE seem concerned about the possibility that people and companies might lose trust in their ability of controlling inflation if they don’t act quickly.

People are increasingly expecting prices to rise faster and Boris Johnson, Prime Minister of the United Kingdom has pledged that he would deliver high-wage jobs. A Bank of America survey (NYSE:) last week found that there was no expectation of rising wages. This suggests that the risk of a 1970-style, damaging wage-price spiral is low.

GRAPHIC-UK public inflation expectations lurch higher: Citi/YouGov

What are the arguments against higher rates?

Economists argue that the BoE should not raise rates until the recovery has been completed.

While 1,000,000 people were on the jobs assistance programme, it was ended. Household budgets will be cut next year.

Taxes will rise for workers in order to cover health care and other services. Meanwhile, state benefits were cut to the greatest extent ever as the government abandoned another pandemic aid measure.

Signs have indicated that some households are now saving in aggregate rather than spending.

There are many examples of economic recovery that were hampered by attempts prematurely to restore policy to normal. This was the case when the European Central Bank raised rates in 2011, following the financial crisis.


The BoE made it clear that rates would remain at historic low levels even though they rise in the future.

However, economists and investors are still divided on the extent of any hikes.

Futures on interest rates show an approximately 90% chance for a rate increase of 15% by the end the year. Prices will also price in another 25 basis points rate hike mid-year.

Economists believe that the MPC will move much slower.

Samuel Tombs from Pantheon Macroeconomics stated that “we now believe that the MPC would hike Bank Rate in Q2 to 0.25%, but that that’s all it will take next year. They can also wait 12 more months before they have to increase Bank Rate again.”

Andrew Sentance was a BoE former policymaker. He said that one rate rise may not be enough in the immediate term to address the rising inflation, which could reach as high at 6%.

BBC radio host said, “They must send a message that they are ready to do something about this and that some gradual rises would be that signal.”

GRAPHIC-Expectations for BoE rate hike by end-2022 build

Mike Robinson
Mike covers the financial, utilities and biotechnology sectors for Street Register. He has been writing about investment and personal finance topics for almost 12 years. Mike has an MBA in Finance from Wake Forest University.