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Interest rates: Bank of England may raise rates this December - and again in early 2022

Daily Express logo Daily Express 23/10/2021 Patrick O'Donnell
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Experts from Vanguard, the investment management firm, are cautioning the British public on the potential economic reality of staggering interest rates following the pandemic. Interest rates have been a point of discussion and contention among financial experts due to the series of supply crises that have hit the UK over the last couple of months. This has been caused by a sharp increase in gas prices, which in turn is raising the costs of production for the country's businesses and affecting the living costs for ordinary people.

On top of this, rising food prices and the worldwide issues relating to petrol are also contributing to various banks predicting an interest rate hike.

Inflation was found to have dropped slightly for the month of September this year, but this did not take into account the surge in energy prices or the petrol crisis.

Vanguard is currently forecasting inflation to peak at a higher level this year at above 4.5 percent year-on-year.

The investment firm also predicts the economic shock will last longer than many economists expect.

READ MORE: Halifax and Lloyds Bank to close 48 branches across the UK - full list of closures

bank1 © GETTY bank1

If inflation was to jump by Vanguard's estimates, interest rates are guaranteed to see a similar jump, it's suggested.

Shaan Raithatha, an Economist for Vanguard Europe, outlined his concerns about how the Bank of England could potentially hike interest rates despite the growing rise in living costs.

Mr Raithantha said: "Weighing all these factors together, we judge that the Bank of England will begin raising interest rates in February, bringing this forward from our previous call for a hike in the third quarter of next year.

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"If the upcoming data shows the labour market and general activity is holding up well, the bank may even be tempted to move as early as December of this year and follow this up with another increase in February.

"We still believe, though, that monetary policy will tighten only gradually over the medium term.

"The process of interest rate normalisation looks set to begin sooner rather than later but the Bank of England will remain averse to raising interest rates too quickly, as it would risk constraining an already slowing economy that is still recovering from the effects of the pandemic.

"Also, as we previously flagged, the bar for raising the floor for interest rates significantly above 0.5 percent is now higher as quantitative easing will begin unwinding.

bank2 © BANK OF ENGLAND bank2

"A continuingly low interest-rate environment is one of factors contributing to Vanguard's view that stock and bond market returns will be relatively subdued over the next decade."

Earlier this week, Andrew Bailey, the Bank of England's Governor, raised concerns about a potential increase in interest rates after the Monetary Policy Committee meeting.

In the latest IHS/Markit Composite Purchasing Managing Index (PMI) survey, the UK's economy was found to have improved slightly in October, from a PMI of 54.9 to 56.

Commenting on the PMI survey, Mike Owens, Global Sales Trader at Saxo Markets, outlined why the country's latest economic developments prove an interest rate hike is all but certain.

Mr Owens explained: "The survey shows a pick-up in growth this month, led by the service sector.

bank3 © GETTY bank3

"Companies are seeing stronger demand at a time of fewer pandemic restrictions.

"The problem is that they are struggling to meet that demand due to current conditions and are being hit by a record jump in costs amid severe staff and raw material shortages.

"We're seeing the pound strengthen following the data release as the growth in these numbers is definitely being accompanied by higher cost pressures and that will add to the case for higher interest rates."

The country's interest rate has been at a historic low of 0.1 percent since March 2020 in response to the pandemic.

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