As expected the Bank of England’s Monetary Policy Committee (MPC) has decided to leave interest rates unchanged at 0.5%.
However, with inflation remaining stubbornly above the target level there is a growing feeling that interest rates may need to rise sooner rather than later.
Andrew Sentance, who is a member of the MPC, is already arguing for interest rates to rise, although at the moment it seems as if he is a lone voice amongst committee members.
However, others, including two former Bank of England policy makers, think differently to the majority of the committee. Charles Goodhart, former member of the MPC, and ex-deputy Governor Sir John Gieve voiced their joint opinion that interest rates will have to rise to keep inflation under control.
Sir John Gieve said: “I am expecting a recovery – when that is strongly established I’d expect rates to start rising faster than the market currently expects. I wouldn’t be at all surprised to see interest rates at 2.5pc a year from now”.
Analysts at Ernst & Young ITEM Club have predicted that rates will not rise until 2014 but Mr Gieves disagreed. He said: “I think the Bank will have learned a lesson from the Greenspan years after the dotcom boom when the US was very slow to raise rates back to normal levels. When the Bank thinks recovery is established they will want to normalise quite quickly”.
Mr Goodhart was concerned about the rise in food prices and inflation, which may cause the government to increase interest rates to control costs. His fears were backed up by figures from the British Retail Consortium that showed that inflation on foodstuffs rose from 1.7 per cent in June to 2.5 per cent in July.
“There is a looming possibility we may get a spike in food prices rising out of climatic conditions, and not just temporarily. I wouldn’t be surprised if food prices lead a rise in inflation of 0.5 percentage points by the fourth quarter”, said Mr Goodhart.
A rise in interest would be good news for savers – assuming of course that any increase is passed on – who will receive a better return on their languishing savings placed in accounts since the credit crunch struck. However, problems could arise for mortgage holders who will see their repayments increase. The current 0.5 per cent rate has meant that many borrowers have been able to keep up with repayments, however any rise in interest rates may increase the number of people falling behind with their mortgage payments, especially at a time when unemployment is expected to rise.