Bank of England Base Rate Increases – Will They Rise Again?

bank of england base rate increases

Bank of England base rate increases can be a painful experience, especially if you have any type of finance agreement that is impacted by a rate increase. Will the Bank of England raise the base rate again and how high will the base rate increase to?

This article explores why the Bank of England will have to raise the base rate and explain what got us into the terrible financial position we are in today.

Bank of England Base Rate Increases – A Mess of its Own Making

During the COVID pandemic, the Bank of England printed a lot of money to try and ease the financial burden on the economy that would be inevitable with the major lockdowns.

At the same time as the Bank of England was printing a lot of money, the government was handing out plenty of money in the form of furlough payments.

These two actions are a recipe for inflation, and it is no surprise after leaving the pandemic we now have double digit inflation in the UK.

Be aware, the attribution of external problems causing inflation is a complete lie.

Double Digit Inflation in the UK

In ANY economy a double-digit rate of inflation is a financial emergency. In the UK, we have protocols in place to avoid this becoming an issue.

One protocol was completely ignored by the Bank of England during the pandemic. To ensure the rate of inflation is kept low, the Bank of England has a target of 2% it is obligated to meet. In short, the Bank of England should not be allowing the rate of inflation to exceed 2%.

However, the Bank of England has consistently been incompetent when trying to meet this target. In fact, I can’t remember a single time when the Bank of England made the target 2%.

This lack of target hitting and the fact no government pulled up the Bank of England in a meaningful way about failures allowed complacency to creep in. It became the norm for the Bank of England to fail to meet the 2% target.

Will There be Further Bank of England Base Rate Increases?

Now instead of trying to manage an inflation rate that is low, the Bank of England must reign in a very high inflation rate.

The current inflation rate is so high that if it were to go much higher, the central bank would have extreme difficulty getting it under control. This is commonly referred to as runaway inflation and causes a country’s economy to begin to collapse.

With that in mind, the Bank of England will have to raise interest rates further.

Inflation is Being Exacerbated by the Government

The Bank of England will have to raise rates quite aggressively over the next year to get a handle on inflation and bring it down to 5% or lower. Ideally, they should still be seeking to make that 2% target, but this is unlikely as the Bank of England finds higher rates of inflation acceptable.

The government is meanwhile spending too much money. Public spending devalues currency further and causes higher rates of inflation.

Currently the government is under pressure to increase wages across the public sector and in some cases, they have agreed pay rises. For the most part they are trying to hold off any increase in public sector pay – which is a good thing.

Public Sector Spending and Bank of England Base Rate Increases

It is easy to feel sympathetic to public sector workers who are struggling to make ends meet with their pay packets, but you should remember the following:

  • Public sector pay is funded by taxpayers,
  • If public sector pay increases, the government will be pumping more money into the economy which is inflationary,
  • If the rate of inflation comes down, the pay rise given in the public sector will far exceed the rate of inflation.

This last point is important. Many unions have jumped at the chance to demand an inflation beating pay increase for their members. If the rate of inflation is controlled over the next 2-3 years, it will leave a public sector purse that is frankly bloated.

The current Conservative government is also continuing to fund energy bills and other cost of living payments. Both are public spending which is inflationary.

Be Wary of Voting for Labour

I am no fan of the Conservative Party, especially one that is so incompetent at managing the economy and panders to popular opinion and spends a lot of taxpayer money on ridiculous things.

The truth is, and you will have seen this in the media, the Conservative Government is not capitulating overall to public sentiment and is refraining wherever possible from spending more taxpayer money.

In my opinion this restraint has not gone far enough, but a bit of restraint is better than no restraint at all in an inflationary economy.

Labour Party Policy is to Increase Public Spending – Inflationary Policy

Labour represents no restraint. Already the campaign is highlighting areas they would be spending more public money. When you consider the rate of inflation, and the pressure public expenditure has on households all over the country this is disgusting.

The Labour party relies on voters who don’t understand inflation to vote for them. There are whole swathes of the population who believe more public spending is the solution to the problems we face. For example, most voters believe throwing more money at the NHS will fix the numerous failings of the Health Service.

Unfortunately, British politics absent of reform is about voting for the least evil of the two parties who compete for power.

london bank tube station

How High Will the Bank of England Base Rate Increases be?

Currently the Bank of England Base Rate is 4.25%.

When the Bank of England increases the Base Rate, it takes many months for the effect of the increase to impact the economy meaningfully. This means it is very hard for the Bank of England to gauge whether an increase has worked to reduce the rate of inflation.

If government policy changes during that period or public spending increases, any increase made may be offset entirely by the government – having a zero-sum effect on the inflation rate.

This is the reason the government is doing all it can to resist the unions and not enter into agreements that increase public expenditure. Rishi Sunak is banking his next election on his ability to reduce inflation and he can only do that by putting a stranglehold on public spending.

Bank of England Base Rate Increases – What to Expect

As mentioned though, public spending is still far too high. Subsidising energy bills is a policy that can’t continue with the Bank of England Base Rate being 4.25%.

This means the Bank of England will probably have to increase the Base Rate to over 6% as things stand. Of course, if the government finds a backbone and cuts back on public spending, this base rate may never be realised.

As always, with my financial articles I remind people, there is no such thing as government money. It is your money, your taxes the government is using for all this public spending. While you may agree with some of the policies and public spending initiatives, you shouldn’t feel obligated to support public spending.

Why? Well, I will answer that with a question: who knows how best to spend your money, you, or Rishi Sunak?

Jon Logan

Jon Logan is an editorial consultant and author that loves living life without boundaries. Over the past 5 years, his content at Immortal Wordsmith has helped thousands of readers gain new perspectives and discover fascinating stories. Jon holds several professional qualifications and is financially qualified in the UK. He left the humdrum world of financial advice to pursue a career in writing – his lifelong passion. He has partnered with local and global brands to help them grow their businesses and audiences through insightful and innovative content strategy. Jon specialises in creating inspirational and thought-provoking writing that challenges readers to look beyond the confines of “the norm.” He uses dynamic writing styles to convey messages to diverse audiences from all walks of life. He is an avid explorer and loves sharing the world from his perspective with his readers.

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