Interest rates remain on hold as prices rise

Interest rates remain on hold following the latest Bank of England Monetary Policy Committee (MPC) meeting.

However, the Bank policymakers did warn that rising household energy bills will send price inflation higher this year, to around 4%.

This winter, a significant contribution to rising prices is the hike in energy regulator Ofgem’s household energy price cap next month. At the same time, wholesale gas and electricity are becoming more expensive.

Higher price inflation is forecast to stay in place until the middle of 2022, placing household finances under growing pressure.

Members of the MPC voted unanimously to keep interest rates on hold at their historic low of 0.1%.

There were two dissenting votes regarding maintaining the Bank’s £895 billion asset purchase programme of quantitative easing.

Despite no changes to monetary policy at this latest MPC meeting, the Bank did warn that severe shortages of workers and raw materials would both serve as headwinds for the UK’s economic recovery.

In a more downbeat than usual assessment of economic prospects, the Bank downgraded its forecast for economic growth by around 1%. This downgraded forecast means that the size of the UK economy at the end of the year will be approximately 2.5% smaller than its pre-pandemic size.

The Consumer Prices Index (CPI) measure of price inflation rose to 3.2% in the twelve months to August, its highest level in almost a decade.

One reason for this sharp rise in price inflation is the comparison with lower prices a year ago and then a rapid economic recovery following lockdown.

The Bank would usually hike interest rates to bring rising price inflation under control but voted unanimously to hold rates on this occasion. The MPC commented that recent developments with price inflation had “strengthened the case” for a modest increase in interest rates in the next few years.

Kevin Brown, Savings Specialist at Scottish Friendly, said:

“The Bank of England’s latest rate announcement is littered with caveats and what ifs. It appears to fail to account for the real situation on the ground, where people are experiencing rocketing prices on a range of core needs.

“The price of gas, for instance, has soared in recent weeks, to the point where it is collapsing energy firms. The Bank seems blind to the fact that people aren’t going to feel this in their wallets today, but will most certainly feel it in three months when the weather is a lot colder and the heating needs to be ramped up.

“Reading between the lines, what is really raised here is the prospect of stagflation – a toxic economic condition for the country to be in where inflation rockets thanks to supply constraints but economic activity collapses nonetheless.

“With prices soaring – we think nearer 5%, rather than the BoE’s 4% prediction – people are going to largely batten down the spending hatches and this is going to kill off the recovery in its relative infancy.

“The Bank warns itself that consumer confidence and therefore growth is already buckling. This is but the green shoots of a much bigger and more pernicious problem yet to come. That the MPC has voted to continue to do nothing at all is worrying to say the least. 

“For savers, the trick is to move quickly. Savings rates have stabilised but remain low and if inflation ticks upwards then your cash is going to steadily lose value. To limit the damage, people should shop around to find the best deal they can. Even if you can’t beat inflation it’s worth trying to minimise your losses.

“Also, it’s worth remembering that if you don’t need ready access to your cash and want to save for the long-term, then stocks and shares can offer greater growth potential.”