Should the Bank of England raise interest rates?

ended 19. September 2021

The Bank of England's Monetary Policy Committee will this week decide whether to raise interest rates to cool down inflation after the biggest jump in the cost of living for over two decades.

Some are predicting inflation could rise above 4% — double the Bank of England's target — by the end of 2021. We asked small business owners around the UK for their views.

 

10 responses from the Newspage community

Star Quote
"The Bank of England categorically should not raise interest rates, or at least not yet. Post 'Credit Crunch', we have created a highly leveraged world but also a highly sensitive one. One wrong move now by Threadneedle Street and it will be roadkill for Christmas lunch, not turkey. "Equally, doing nothing will only exacerbate the problem. We are currently living in a benign world where cheap money is seen as a given. That's fine but people need to know that it's a double-edged sword. We either accept a slow and laborious return to realistic borrowing rates or a high octane life of prices increasing faster than our incomes. We can't have our cake and eat it."
Star Quote
"While inflation is raging at the moment it would be wiser to wait and see if it’s a temporary jump due to Covid or if it’s here to stay. With energy prices spiralling out of control, and furlough coming to an end, it feels as though our economy is working its way through Dante's circles of hell. For now, the Bank of England needs to sit tight, as there are mountains of personal and business debt and highly leveraged young homeowners. At some point we’ve got to stop worshiping at the altar of quantitative easing and cheap money, but just not yet."
Star Quote
"A hike in interest rates will feel like a kick in the teeth for small business owners, just as they are getting their heads around a rise in National Insurance and Dividend Tax (before it becomes the Health & Social Care Levy), plus the known increase in Corporation Tax to follow. An increase in interest on borrowings is the last thing anyone needs right now."
Star Quote
"The country is so unstable and fragile at the moment that even the smallest interest rate rise could tip it over the edge. An increase in interest rates will decimate sentiment among businesses and consumers alike. I think waiting and assessing would be a smarter move for the time being."
"To raise interest rates just as the furlough scheme comes to an end would be madness. Many small business owners have taken out business, personal and bounce-back loans to ensure their survival during the pandemic. A majority of these businesses are not even close to pre-Covid income yet: it could either push businesses to fold or raise prices to accommodate the extra outgoing costs."
"Increasing interest rates right now could have a serious impact on employment levels and put those who have been made redundant in an even tougher position. Ultimately, it will take the economy longer to recover from the pandemic. However, we are experiencing huge skills shortages and vacancies are at record levels so the economy may survive a small tweak."
"I can't imagine Rishi Sunak will mind too much if inflation remains high for a few quarters as it will shrink the national debt to GDP ratio, which is now astronomically high. If inflation is truly being caused by supply side issues including a shortage of labour, then a rise in the base rate is merely a sticking plaster. Making it more expensive for firms to borrow won’t help the situation. "Having the base rate at 0.1% can make the MPC nervous as it removes their ability to lower the rate if it’s already at rock bottom. Getting back to 0.5% at least gives them some wriggle room if there’s a down turn in the near future and could avoid a liquidity trap."
Given that the inflation figures are based on the price difference between 2020 and 2021, and given that 2020 was an unprecedented year, I would hope not. The logic being that these price rises are not "baked in" and will unwind over the next 12 months. The MPC at the Bank Of England have always looked at the wider economic impact of rate increase too, as well as taking a long-term view of any decisions they make. I'm not sure the economy is in a place to absorb a rate increase just yet. So, I would hope they hold off for now.
“As someone whose mother lost her home due to the stratospheric interest rates of the late 80s (think circa 14%), I am sanguine about micro-increases in interest rates. In the grand scheme of things these are minuscule adjustments. Yes inflation is skyrocketing but much of that is adjustments from the bust of lockdown to the post lockdown boom as opposed to a sharp jump in consumer prices. I’m confident inflation will settle back down, and the impact on interest rates long term will be negligible.”
"Please can I step off this financial rollercoaster? Given how many variables there are, all seemingly in flux like a ride on the waltzers, putting up interest rates now will unsettle the extremely fragile stomach we have for change in the economy. We're not screaming and we don't want to go faster. The Bank of England should let things settle as we are still recovering from the pandemic before it makes any drastic changes to the tempo of the economy."