With inflation now out of control, I think the Bank of England will raise interest rates to 1.75% when they meet for review on 4th August. It is inevitable simply because we now know that energy prices will rise by 60% in October due to OFGEM’s price cap calculations which are linked to the wholesale price of energy. That’s a guaranteed rise in inflation right there.
The interest rate rise will be bad for the finances of the UK. We’ve already seen record debt interest payments on the National Debt, in May and June. In June for example, the Chancellor, Rishi Sunak had to borrow £23 billion to finance £19 billion in debt payments, a record for a single month. But, will that record be broken in the coming months?
The forecast for UK borrowing has already risen from £87 billion to £104 billion for 22/23, and this is, in part, due to the fact that one quarter of the £2.4 trillion National Debt is linked to QE for which interest payments are linked to the Bank of England base rate. Money was borrowed under a “Deed of Indemnity” signed by Rishi Sunak which saw the UK borrow £450 billion at 0.1% interest. The current interest rate on that money is twelve and a half times greater and will rise again on 4th August, leading to even higher debt interest payments. It’s no wonder Sunak resigned as Chancellor, two debt interest records are enough for anyone.
So, will 1.75% mark the peak of UK interest rate rises? I seriously doubt that. Measured by the Retail Prices Index, inflation now stands at 11.7%. This Autumn, millions of public and private sector workers will demand wage rises, and most are asking for 8% and above. There will have to be settlements and that will increase inflation. The energy price rises in October of 60% under the energy price cap, will obviously add to inflationary pressure, and I can see the RPI rate being easily 15% or more, so, it is very possible that the Bank of England will be forced to raise rates to 7% or even higher. One thing is clear, the cost of living crisis in the UK is set to get much worse.