University of Birmingham: Bank of England’s decision to raise interest rates is long overdue

“The Bank of England’s decision to raise interest rates by 0.75% to 3% was expected, and many would argue has been long overdue. Raising interest rates to damper inflation requires the Bank of England to think and act strategically and to try to avoid following the market. There is a tendency for the Bank of England to follow macroeconomic events rather than intervene at the right time. Of course, one could argue that it is impossible to identify the right time. Nevertheless, the fact that this increase was expected would suggest that the Bank has acted rather too late. This delay will mean that interest rates will continue to rise rapidly over the next six months.

This increase will be welcomed by savers but will have dramatic consequences for households who are over-leveraged. There is a very naive political debate on-going today over this increase in interest rates. Sir Keir Starmer made the obvious point that the increase will make life much harder for people. But, not for all people. The Shadow Chancellor, Rachel Reeves, argued that 12 years of Tory government has weakened the foundations of the UK economy. This is an odd statement to make at a time when the UK experienced full employment for the first time in March 2022. It is important to stand back from any statement that the increase in interest rates is down to government ineptitude. The UK’s inflationary crisis is not down to any action taken or not taken by the UK government. Much of this pressure is linked to COVID-19 and supply chain issues combined with the inflationary impacts of the Russian Ukrainian war. These external factors are outside the control of the UK government.

“It is important to remember that interest rates in the UK are not high. I took out my first mortgage when interests rates were 15.4%. This level of interest was considered normal at that time as we had learnt to live with these interest rates. The fact that interest rates have been low for so long has encouraged too many politicians, banks, and households to assume that low interest rates are here for the long-term. This is an assumption that no one can make as interest rates go up and down in response to events. Sometimes these events can be controlled by the UK government and sometimes these are external events that reflect the impacts that globalisation has on any one national economy.

“A key issue is that the most vulnerable households – those with high levels of debt – will become even more vulnerable as they experience a rapid spiral of debt accumulation. There is a danger that such households fall for scammers who target the most vulnerable. As always, if a deal looks too good to be true then it probably is and should be avoided. Households experiencing financial pressure should seek advice from reputable organisations and to do so as early as possible”