The Bank of England will announce its latest decision on interest rates on Thursday, and is widely expected to raise them for the sixth time in a row. Interest rates currently stand at 1.25%, but the central bank could increase them to as much as 1.75%. If so, that would be its highest level since December 2008.
The Bank hopes to slow the rate at which prices are increasing. It has warned that inflation could pass 11% later this year.
Prices are going up quickly worldwide, as Covid restrictions ease and consumers spend more.
Many firms have problems getting enough goods to sell. And with more buyers chasing too few goods, prices have risen. There has also been a very sharp rise in oil and gas costs – a problem made worse by Russia’s invasion of Ukraine.
One way to try to control rising prices, or inflation, is to raise interest rates. This increases the cost of borrowing and encourages people to borrow and spend less. It also encourages people to save more.
However, it is a tough balancing act as the Bank does not want to slow the economy too much.
Since the global financial crisis of 2008, UK interest rates have been at historically low levels. Last year, they were as low as 0.1%.
Many analysts have predicted UK interest rates will rise this month, but further increases are also expected later in the year.
Analysts at Capital Economics think the Bank will ultimately have to lift rates to 3% to quash inflation, but other economists think they won’t have to go so high. Pantheon Macroeconomics reckon interest rates will peak at 1.75%.
Last year, the Office for Budgetary Responsibility (OBR), the government’s independent economic adviser, looked at what might happen if the UK were to experience higher and longer lasting inflation.
This can happen when people think price rises will continue – businesses raise prices to keep making a profit and workers demand wage increases to keep up. If this happens UK interest rates could hit 3.5%, the OBR said.
The UK is affected by prices rising across the globe. So there is a limit as to how effective UK interest rate rises will be.
However, other countries are taking a similar approach, and have also been raising interest rates
The US central bank has announced big rate rises in the last couple of months. The Federal Reserve increased rates by three-quarters of a percentage point in June and then again in July, to a range of 2.25% to 2.5%.
The European Central Bank has also raised rates for the first time in more than 11 years, while Brazil, Canada, India, Australia and Switzerland have increased rates too.