Published On: Wed, Nov 24th, 2021

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Inflation to make interest rates rise “unavoidable”

Despite the fact that the savings market is struggling at the moment, many expect interest rates will rise in the coming months as the Bank of England will be forced to react to inflation.

Recently, inflation, as measured by the Consumer Price Index, reached 4.2 percent. This is the highest it has been in 10 years and more than double the Bank of England’s two percent target.

In recent months, the Bank of England and individual policymakers at the central bank have hinted rate hikes may be on their way and Vasso Ioannidou, a Professor of Finance at Bayes Business School noted these increases will be coming sooner rather than later.

He said: “Based on the latest figures, the inflation rate of 4.2 per cent is more than twice as high as the Bank of England (BoE) target rate. It is significant that it is expected to rise even further in the next months, so it is unavoidable that the BoE will have to raise interest rates and do so very soon.

“The rise in inflation implies a loss in purchasing power, with shoppers being able to afford fewer goods or services with the same amount of money. “The loss in the real value of disposable income, currently projected at around seven percent, combined with increases in taxation, is significant.

“The current increase is largely driven by a rise in fuel costs and a double digit-rise in energy prices. This affects low-income households more as transportation and heating expenses are typically a larger fraction of their budget.”

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