Interest rate warning for businesses and households

Today’s decision by the Bank of England to hold interest rates will offer some breathing space for north west businesses and households, but the prospect of another rise is growing as inflation continues to climb.

That is the verdict of Emeritus Professor Joe Nellis, head of economic research at north west accountancy and advisory firm MHA.

As anticipated, interest rates have been held at 3.75 per cent for the sixth time in a row by the Bank of England. But, with inflation rising from 2.9 per cent to 3.2 per cent in August and remaining above the Bank’s two per cent target, Joe says attention will now firmly turn to the Monetary Policy Committee’s next meeting in November – when a rise to four per cent looks possible. 

Joe said: “Leaving interest rates unchanged provides households and businesses with some short-term relief, but the odds of a rate hike in November are rapidly increasing.

“For homeowners, the prospect of higher interest rates means continuing pressure on mortgage borrowers, particularly those who are re-financing lower fixed-rate deals. Businesses also face higher financing costs at a time when investment and confidence are already fragile.

“While interest rates have been held today, the critical question is, ‘What happens next, and how restrictive may the Bank’s monetary policy have to become?’ 

“The Bank of England is concerned that inflationary pressures are still with us and proving to be more persistent than previously expected. Most importantly, if there are signs that higher energy and other costs are feeding through into wage demands, policymakers will see monetary tightening as necessary to stop inflationary expectations from becoming embedded.”

The inflation figures also create an uncomfortable backdrop for the government ahead of the Autumn Budget – which will be delivered on October 28.

Joe added: “Inflation will push the cost of servicing the national debt up even higher. With the interest bill for this financial year already likely to be around £115bn, this further squeezes an already limited fiscal headroom. 

“The chancellor will need to convince financial markets that the state of public finances remains credible. Any unfunded spending commitments or fiscal giveaways could create a vicious circle and push borrowing costs even higher. With the Bank of England next meeting after the Budget, the government must act in anticipation of its decision.”