Should the Bank of England raise interest rates this year?

ended 13. October 2021

Markets are increasingly betting that the Bank of England will raise interest rates before Christmas to contain spiralling inflation.

With this in mind, we asked a selection of small business owners around the UK to answer one simple question:

  • Should the Bank of England raise interest rates this year or not — and why?

Their responses are below…

13 responses from the Newspage community

Star Quote
"Against a backdrop of rising energy prices, recovery from the pandemic, HGV driver shortages, increasing taxes and ongoing Brexit negotiations, the economy surely faces far too many headwinds for the Bank of England to consider a base rate rise anytime soon. Rather than an actual hike in the base rate, the Bank of England needs to adopt what Mervyn King called the 'Maradona theory of interest rates'. This referred to a certain famous Maradona goal against England where he beat five English players while running in virtually a straight line. Maradona was able to clear a straight path towards goal by signalling to the defenders that he might be about to turn. Making people believe a rate rise might be imminent can create the right level of caution in parts of the economy, while avoiding the potentially damaging effects of an actual rise. A neat trick if the Bank can pull it off."
Star Quote
"With one in five mortgage holders confirming they have used their own savings to cover their mortgage payments this year, a Bank of England base rate rise could be catastrophic for people across the country. Many are already on the breadline, with some dangerously close to the tipping point of no return if their outgoings increase further. A base rate rise, while potentially needed to stem inflation that is already spiralling out of control, must be managed extremely carefully and only as a last resort, especially as we enter the Christmas period where family finances are always stretched and debt easily built up."
Star Quote
"The current inflation we are seeing is largely being driving by supply-side shortages rather than excess demand. Raising interest rates may reduce demand, and will be welcomed by savers, but it is unlikely to reduce inflation and could be disastrous for borrowers."
Star Quote
"It's a hugely challenging time for the economy, with shortages in raw materials and rising prices causing inflation. However, the same rises are not yet being seen in wages, so any increase in interest rates at this time will cause further pain to the many households that are already struggling to cope with the increased cost of living. A mortgage rate increase will likely see a number of people struggle to pay the mortgage, which will put their home at risk. The economy simply isn't yet back to full power due to the effects of the pandemic so any rise should be kept off the agenda until we are through a potentially difficult winter."
Star Quote
"The simple answer to whether there should there be a rate rise is no. There is no doubt that inflationary pressures are building but they appear to be temporary and should fall away in the next year or so. For now, it's important to build confidence in a fragile economy and maintain growth, and a rate rise risks scuppering that. Choking things now could impact confidence, stifle spending and knock the recovery off-course."
Star Quote
"I think we need to see a base rate rise this year. At the start of the pandemic, the base rate was reduced from 0.75% to 0.25% and then to 0.1%. I am not convinced we needed the reduction then and the longer we leave it to increase, the harder people with mortgages will find it when we do. And let's not forget those who are reliant on savings. An increase to somewhere between 0.25% and 0.75% would be welcome."
Star Quote
"Rates have to rise at some point, but to do so now would be a crazy idea. The economy and sentiment are just too fragile. You also have to factor in the impact of rate rises on house prices, as the Government's mortgage guarantee scheme for those with a 5% deposit means the tax payer will once again be on the hook."
Star Quote
"A rise in interest rates ahead of Christmas runs the risk of curtailing high street spend, pushing consumers to save and not spend, which will further slow economic recovery. We need people spending to keep money flowing in the economy, and without consumers consuming, how are we to deliver on Boris Johnson's promised 'high wage economy'?"
"The Bank of England should seriously consider increasing the base rate. Right now it has very little control over monetary policy because it can’t lower interest rates. It has effectively backed itself into a corner. This means that, if the economy heads south, the Monetary Policy Committee can’t react by lowering the base rate to help out. This risks what’s called a liquidity trap. People might worry that their mortgage or loan payments may increase, but most people are on fixed deals to protect against this anyway. Also, when the base rate dropped last year mortgage interest rates actually went up, and now there’s talk of the base rate increasing, and mortgage interest rates have been in freefall. The two are not as linked as mot people believe."
"No no no. How will raising the rate of interest curb inflation at this time? During the pandemic, self-employed people have obliterated any savings they had to survive during the various lockdowns. Raising interest means mortgage payments go up, therefore people will have less disposable income. Unless actual wages and benefits (universal credit) raise to match the rate of inflation, food banks will be the only way to fight poverty."
"Rates inevitably need to go up and while there are benefits to keeping them low while the economy recovers, there are also many reason to increase them now and do it on a gradual incline, rather than holding out and having a sharper increase in the future."
"Raising interest rates this year would be about as welcome as a hole in the head. Given that the government is on the hook for the mortgage guarantee scheme, the inevitable impact of a rate rise on house prices for people who only had a 5% deposit wouldn't be a great idea. Also, any increase in buy-to-let mortgage rates caused by a rate rise will inevitably be passed onto already squeezed renters. So we're in a Catch-22 situation at the moment whereby raising the base rate may actually make inflation worse. Can it be fixed? Yes. How? Unpopular opinion time: we need to join European Free Trade Association and accept the Schengen Agreement."
"I would hope not. While inflation is rising, we are comparing 2021 costs to 2020 costs. Both years have seen unprecedented change and Government stimulus that have skewed the figures massively. If the inflation rate doesn't look to be unwinding at the start of 2022, however, or long-range forecasts don't show it returning to target by late 2022 or early 2023, then I think Threadneedle Street may have no choice."