Expert comment: Rate increase will make things worse

Categories: Salford Business School

The Bank of England has today raised interest rates for the second month in a row as it sends a signal to markets that it is determined to lower inflation. But what will the impact be?


Here Dr Tony Syme, macroeconomics expert from the University of Salford Business School says it could hit people already struggling with cost of living increases.

Dr Syme said: “The Bank of England is required to act, but this will only make things worse for the British population.

“The key question is will these interest rates rises bring down inflation?

“Behind the ONS statistics, there are four common themes throughout: the exceptional rise in the price of energy, rising fuel and thus distribution costs, staff shortages due to the pandemic and Brexit, and poor harvests.

“A rise in interest rates will have no effect on any of these. These are driven by supply-side issues and interest rates are primarily a demand-side tool.

“The Bank of England has publicly stated that the reason for the increase in inflation in 2021 was the easing of Covid restrictions, and raising interest rates would be effective for this type of demand-pull inflation. But that pent-up demand has lessened considerably and it is only a small part of the reason for the current increase in prices.

“The increase in interest rates will have minimal effect on inflation and will only exacerbate the cost of living crisis. Higher housing costs will be passed onto homeowners through increased mortgage rates and onto renters as landlords pass on their increased costs of borrowing.

“And then there is the effect on credit repayments. As of October 2021, UK households had £55bn outstanding on their credit card balances. Monthly repayments on credit cards will rise and put many households into real difficulty in meeting their credit commitments if these interest rates continue to rise.”

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