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Faisal Islam: How high will interest rates go?
The Bank of England has raised interest rates to 4%, with its committee divided over whether further increases are needed. The article’s assessment is that one more rise, likely in February, is expected, but the decision depends heavily on how the Iran war affects inflation and the economy.
The Bank forecasts inflation approaching 5% next spring, partly as a typical household energy bill is set to rise by 27% to £2,150 a year. Oil has been below the $108-a-barrel average used in its forecast, while UK growth has been stronger than expected: 0.6% and 0.5% in the first two quarters, with 0.7% forecast for July to September. Unemployment has stabilised and sterling has strengthened, which could make imports cheaper and help curb inflation.
In short
- Interest rates have reached 4%.
- One more rise is expected, probably in February.
- The outlook depends on war, inflation and economic data.
Steelman: both sides, in good faith
The strongest fair case each way — we don't pick a winner.
The case for
Further rate rises could help bring inflation under control and prevent higher energy costs from feeding into broader price and wage increases. If inflation stays near 5%, acting now may protect households’ purchasing power and the Bank’s credibility, even at the cost of weaker borrowing and spending.
The case against
Further rises could unnecessarily restrain an economy already facing higher household energy bills and uncertainty from the Iran war. Oil prices have been below the Bank’s forecast assumption, while stronger growth, stable unemployment and a firmer pound may ease inflation, so waiting for clearer evidence could avoid added pressure on households and businesses.