Dr Esmond Birnie: Increasing interest rate now could lessen pain down the line
Cautiously, they are waiting for further data about the state of the UK jobs market.
They have signalled increase(s) is/are on the cards in the “coming months”.
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Hide AdThe money markets had actually pencilled in that the Bank would overcome its hitherto habitual ‘doveishness’ to push rates from 0.1% to 0.25%.
A small increase is certainly on the cards either now or within the next six months as inflation creeps up beyond the Bank’s 2% target. It may even reach 4-5% in a few months.
There may be a sense of a “stitch in time saves nine”: if the process of raising rates starts early enough the eventual total increase will be less than it might otherwise have been.
Some pain now, and in a series of limited instalments might be better than getting a really big shock in, say, mid 2022.
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Hide AdNow, the increase when it comes will undoubtedly be bad news for borrowers (maybe a little comfort to savers in all of this but the banks will probably take a while to pass on higher rates to savers).
Take a variable rate mortgage (say, a typical 2.5% over 20 years) and sums borrowed between £100,000 and £200,000, then the monthly repayments might go up by between about £7 and £11.
Some might say such additional payments are not very much but any increase in the next few months may be only the first of a series of similarly sized increases taking the Bank’s rate to 0.75% by mid 2022.
And, we also have to factor in all the other increases in living costs, notably petrol and diesel and home heating.
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Hide AdAt the same time, and not that many people can now remember the mid 1970s, we really don’t want to return to the bad only days of high inflation.
The Bank of England may be too optimistically assuming that recent inflation rises are a short term phenomenon and that there is little danger of a domestic wage-price spiral starting.
• Dr Esmond Birnie, Senior Economist Ulster University Business School
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