High interest rates will ‘hinder economic growth’, says economic expert as Middle East crisis escalates

High interest rates will ‘hinder economic growth’, says economic expert as Middle East crisis escalates

High interest rates will hinder economic growth and damage an already weakening labour market, according to a UK economic expert reflecting on the Bank of England’s decision to keep rates unchanged amid the rapidly escalating crisis in the Middle East.

Professor Joe Nellis is economic adviser at accountancy and business advisory firm MHA, the UK member firm of Baker Tilly International, which has offices in Preston and Lancaster.

Speaking after the decision on Thursday (March 19) by the Bank of England’s Monetary Policy Committee to keep interest rates at 3.75 per cent, he pointed to the growing energy crisis in the Middle East raising the risk of monetary tightening.

He said: “The Bank of England’s decision reflects a growing sense of caution within the Monetary Policy Committee.

“While inflationary pressures in the UK had been easing in recent months, the rapidly escalating crisis in the Middle East has introduced a new and potentially powerful inflationary risk.”

“Oil and natural gas prices have risen significantly in global trading markets, reflecting concerns about possible disruptions to supply and key shipping routes. If these increases are sustained, the impact could quickly feed through into higher transport costs, rising manufacturing expenses and more expensive household energy bills.”

Joe highlighted that the Bank of England was criticised for being too slow to act during global inflation of 2021-22 and this meant it would be keen to be on the front-foot amid inflation concerns in the coming months.

He said: “Interest rates are unlikely to fall anytime soon and could even rise again. Businesses hoping for lower borrowing costs instead face the prospect of rates remaining elevated for longer at a time when many sectors are already dealing with higher operating costs.”

Joe added this was likely to dampen corporate investment, particularly in recruitment, undermining government attempts to reverse rising unemployment and generate growth in the economy.

“Just as businesses and consumers alike had begun to dream of a low-interest rate environment, inflationary pressures have been reignited,” he said.

“The Bank has a tough balancing act on its hands, knowing that raising rates could hinder economic growth. But its main priority will always be stabilising prices. Policymakers will not be afraid to hike interest rates if necessary to prevent spiralling inflation.”