Markets are increasingly betting that the Bank of England will raise interest rates before Christmas to contain spiralling inflation.
The shift came after two of the Old Lady’s most senior officials gave the strongest signal yet that the central bank is ready to choke off inflation.
Strengthening predictions over a looming rate hike triggered a sell off in government bonds, driving borrowing costs to levels not seen in over two years, hitting 1.21 per cent.
With this in mind, City A.M. asked a selection of City insiders, analysts and small business owners to answer one simple question: Should the Bank of England raise interest rates this year or not, and why?
Rob Gill, managing director of Altura Mortgage Finance, does not think now is the time to hike interest rates.
“Against a backdrop of rising energy prices, recovery from the pandemic, HGV driver shortages, increasing taxes and ongoing Brexit negotiations, the economy surely faces far too many headwinds for the Bank of England to consider a base rate rise anytime soon,” he told City A.M. this morning.
Rather than an actual hike in the base rate, the Bank of England needs to adopt what Mervyn King called the ‘Maradona theory of interest rates’, he continued.
Mervyn King referred to a certain famous Maradona goal against England where he beat five English players while running in virtually a straight line.Rob Gill
“Maradona was able to clear a straight path towards goal by signalling to the defenders that he might be about to turn. Making people believe a rate rise might be imminent can create the right level of caution in parts of the economy, while avoiding the potentially damaging effects of an actual rise. A neat trick if the Bank can pull it off,” Gill said.
However, Joshua Gerstler, a chartered financial planner and owner of The Orchard Practice, thinks a base rate rise is needed this year.
At the start of the pandemic, the base rate was reduced from 0.75 per cent to 0.25 per cent, and then to 0.1 per cent.
“I am not convinced we needed the reduction then and the longer we leave it to increase, the harder people with mortgages will find it when we do. And let’s not forget those who are reliant on savings. An increase to somewhere between 0.25 per cent and 0.75 per cent would be welcome,” Gerstler said.
Doug Miller, director at Lansdown Financial Services, does not think markets are able to digest a rise at this stage. In fact, he calls the whole idea “catastrophic.”
“With one in five mortgage holders confirming they have used their own savings to cover their mortgage payments this year, a Bank of England base rate rise could be catastrophic for people across the country,” Miller shared with City A.M.
“Many are on already on the breadline, with some dangerously close to the tipping point of no return if their outgoings increase further,” he said.
A base rate rise, while potentially needed to stem inflation that is already spiralling out of control, must be managed extremely carefully and only as a last resort, especially as we enter the Christmas period where family finances are always stretched and debt easily built up,” Miller continued.
Since the current inflation jumps are largely driven by supply-side shortages, rather than excess demand, raising interest rates may reduce demand, and will be welcomed by savers, according to Scott Gallacher, director at Rowley Turnton.
A rate rise is unlikely to reduce inflation and could be disastrous for borrowers.Scott Gallacher
This view is largely shared by Mark Scott, operations director at Azura, who points out that it’s a hugely challenging time for the economy, with shortages in raw materials and rising prices causing inflation.
“However, the same rises are not yet being seen in wages, so any increase in interest rates at this time will cause further pain to the many households that are already struggling to cope with the increased cost of living,” Scott told City A.M.
He pointed out that a mortgage rate increase will likely see a number of people struggle to pay the mortgage, which will put their home at risk.
“The economy simply isn’t yet back to full power due to the effects of the pandemic so any rise should be kept off the agenda until we are through a potentially difficult winter,” he added.
Lewis Shaw, the founder of Shaw Financial Services, also thinks the idea of raising interest rates now is far from a good idea.
Raising interest rates this year would be about as welcome as a hole in the head.Lewis Shaw
Given that the government is on the hook for the mortgage guarantee scheme, the inevitable impact of a rate rise on house prices for people who only had a 5 per cent deposit wouldn’t be a great idea, he noted.
“Any increase in buy-to-let mortgage rates caused by a rate rise will inevitably be passed onto already squeezed renters. So we’re in a Catch-22 situation at the moment whereby raising the base rate may actually make inflation worse. Can it be fixed? Yes. How? Unpopular opinion time: we need to join European Free Trade Association and accept the Schengen Agreement,” Shaw said.
Finally, Debbie Porter, who is the managing director of digital marketing agency Destination, said a rise ahead of Christmas runs the risk of curtailing high street spend, pushing consumers to save and not spend, which will further slow economic recovery.
“We need people spending to keep money flowing in the economy, and without consumers consuming, how are we to deliver on Boris Johnson’s promised ‘high wage economy’?”