Will interest rates rise to 1.75% today (or will they go higher)?

The Bank of England meets today to determine if interest rates need to be higher than the current rate of 1.25%. We will know shortly what they’ve decided, but the expectation is that interest rates will rise by at least 0.5%. Inflation today stands at 11.8% measured by the Retail Prices Index and it’s widely agreed that energy prices are driving inflation in the UK. Ofgem’s energy price cap allows energy suppliers to charge 29p per KWh and that will rise to around 50p per KWh when the energy price cap is increased by 77% in October. It’s pretty obvious that inflation will rise, probably to around 15% over the coming winter and so, a 0.5% rise in interest rates at this time is probably the least we can expect, with a further rise in October probable.

People paying their mortgages at the standard variable rate will see increases and credit will become more expensive to service, however, the interest rate rise will have no effect whatsoever on the rising price of energy in the UK market, so, it’s hard to see how raising interest rates can do much to reduce inflation which is currently wreaking havoc on household budgets. The only way to really cut inflation that I can see, would be to reduce the unit cost of energy, either by nationalising energy supply and capping wholesale prices or rationing supply of energy to reduce the use of expensive fossil fuels to meet peak time demand. A combination of both these measures, together with a roll out of domestic solar panels, wind turbines and storage batteries would be the most effective way to cut unit prices, but I seriously doubt anything like this to happen in my lifetime. Instead, we’ll probably have another “windfall tax” raising another paltry £5 billion, which will do nothing to fix the long term problems associated with the current energy policy favoured by all political parties in UK.

So, we can see clearly that inflation is set to rise further this coming Autumn and Winter. It’ll be fueled by rising energy prices, food shortages, and wage rises like the 8% “bonus” all Shell staff will receive due to record profits at the company. I doubt an 8% pay deal will be offered to all public sector workers though, and we’ll probably see months of strike action from Teachers, Nurses, Council Workers, and more, which will heap further misery on the British public. I doubt any of the candidates for the next Prime Minister has the qualities required to navigate the UK through the coming months of hardship, and the Treasury has simply run out of free cash to throw about on new “schemes” to help the poorest. Every time interest rates rise, our debt burden becomes greater, with interest on the UK’s National Debt already forecast to be £104 billion this year (22/23). Don’t be surprised if that forecast is revised higher in the coming weeks. The fact is that the lockdowns have technically bankrupted the UK and, apart from the wealthiest, we’re all in for a very long period of financial hardship.

UK businesses are going bust at record levels

In June, Rishi Sunak borrowed £23 billion to pay £19 billion debt interest, a record for a single month

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