The Bank of England’s unanimous decision to raise interest rates to four per cent reflects serious concerns over persistent inflation, not just external shocks.
asserted
decision → raise → inflation
The government most now address root cost issues rather than blaming external factors like the war in Iran, says Emmanuel Igwe
The war in Iran has been central to the Bank of England’s considerations around interest rates for the most of this year.
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war → address → year
In September, only three of the nine members of the Monetary Policy Committee (MPC) voted to raise rates.
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members → vote → rates
But this changed this week as, for the first time since August 2023, all nine members voted to increase the Bank Rate.
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members → change → Rate
Although eight members supported the rise from 3.75 to four per cent, Catherine Mann wanted the Rate increased to 4.25 percent.
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Rate → support → percent
The Bank settled on an increase to four percent.
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Bank → settle → percent
This decision does not come as much of a surprise to the markets, though the unanimity was unexpected.
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unanimity → come → markets
Economists had expected a seven-two split, with those not voting for an increase assumed to support a hold.
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those → expect → hold
A unanimous vote reveals something important: the Bank does not consider energy shocks to be a temporary blip.
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shocks → reveal → something
During the press conference, the Bank admitted that, although the shock has not yet passed through to wider wages and prices, it did not want to sit idle and wait until it does.
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it → admit → wages
Central bankers typically overlook temporary supply shocks such as increases in oil prices as they only lead to a one-time increase in the price level, not persistent inflationary pressures.
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they → overlook → level
More concerning are second-round effects, such as businesses raising prices to protect profit margins and workers asking for increased wages to keep up with the rising cost of living.
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workers → raise → living
Running hot
CPI inflation was up from 3.1 in August to 3.5 percent in September, driven mostly by rising fuel prices.
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inflation → run → prices
68 per cent of businesses in the Bank’s October Decision Maker Panel said that energy shocks are behind their intentions to raise prices.
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shocks → say → prices
The OBR expects inflation to peak at 3.75 percent early next year.
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inflation → expect → percent
The forecast from the Bank, released today, shows a gloomier prospect: a rise in inflation of up to five per cent by mid-2027.
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forecast → release → mid-2027
In addition to this, the economy is running hot.
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economy → run → this
It is welcome news that Britain was the fastest growing economy in the G7 in the first half of this year.
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Britain → grow → year
But this is a low bar, and even our modest growth has been met with knock-on price effects from global energy trade.
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growth → meet → trade
This creates an environment in which businesses pass rising costs to shoppers through raising prices.
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businesses → create → prices
The Bank says this affected its decision to increase interest rates.
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this → say → rates
Impact on households will vary.
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Impact → vary → households
For those with tracker mortgages, payments will go up immediately, while lenders will pass on interest rate increase to those with variable rates within a month.
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lenders → go → month
Those with a fixed mortgage rate will be initially insulated from the rate increase but will face a sharp payment increase when their current deal ends and they must remortgage.
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they → fix → increase
In a rare bit of good news, those with cash savings, such as prospective first-time buyers, would finally earn a bit of interest after a long while.
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those → earn → while
Businesses will perhaps suffer more.
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Businesses → suffer → more
Firms already shouldering inflated energy bills due to the Iran war now have to contend with higher borrowing costs.
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Firms → shoulder → costs
Small businesses heavily reliant on variable-rate credit lines and overdrafts will feel it first.
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businesses → feel → it
This will cast a shadow on the business investment that was the catalyst for Britain’s economic growth this year.
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that → cast → growth
Markets are pricing in the prospect for up to four more quarter-rate rises by the end of 2027.
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Markets → price → 2027
If this persists, businesses will see their profits squeezed well into next year.
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profits → persist → year
With a fiscal headroom of £15bn – down from £23.6bn recorded in March – the OBR estimated that higher than expected inflation would add £14bn a year to government borrowing costs this parliament.
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inflation → record → costs
If markets expect a long run of rate rises, debt interest will eat into whatever buffer the Treasury has left.
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Treasury → expect → buffer
Critics such as the New Economics Foundation call today’s decision “an act of economic self-harm”.
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Critics → call → harm
But to hesitate at this moment would be fatal.
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hesitate → hesitate → moment
When a central bank hesitates to act when businesses are signalling to raise prices, it risks losing a grip on market expectations.
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it → hesitate → expectations
By raising rates today, it limits the intensity of rate hikes later.
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it → raise → hikes
Higher interest rates may cool domestic demand, but they cannot lower energy prices or open the Strait of Hormuz.
uncertain
they → cool → Hormuz
Things may change.
uncertain
Things → change → ?
Energy prices fell after the US midterms this week in an expectation of de-escalation in Iran.
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prices → fall → Iran
…and 9 more, not listed.
The Aporia
