Interest rates set by central banks like the BoE play a significant role in determining the cost of borrowing for businesses, governments, and ordinary people. Recently, the BoE has been on a spree, adjusting the rates frequently.

The Bank of England is preparing, yet again, to make an upward adjustment to the interest rates. If it goes ahead, this will mark the 15th consecutive rise, a trend they’ve been consistent with in an attempt to control inflation.

However, these adjustments have come amid concerns. The national unemployment rate has been on the rise, and economic growth has seen a slowdown. But why then is the bank still considering an increase?

Balancing Act: Inflation vs. Growth

Threadneedle Street has been keen to control inflation. While economic growth and employment are essential, unchecked inflation can erode the purchasing power of money, affecting everyone’s living standards.

Many in the financial sector believe that the primary motivation for the proposed 0.25 percentage point increase (taking rates to 5.5%) is due to concerns over wage inflation. In essence, as wages rise, the cost of goods and services can also increase, leading to a cycle of ever-increasing prices.

Interestingly, the Bank of England has faced criticism in the past for being somewhat late in its response to inflation, especially post the Covid-19 lockdowns. The current frequency of rate adjustments seems to be their way of making up for it.

A Pause in the Trend?

While the trajectory seems to be continuously upward, there are signs that this might be slowing down. Andrew Bailey, the Bank’s governor, recently hinted that we might be nearing the peak in terms of rate hikes. This sentiment was echoed by the Bank’s chief economist, Huw Pill, suggesting that we might soon see a plateau in interest rates, rather than a continuous ascent.

Most of the financial world interpreted this as a hint that rates might stabilise soon, hovering around the current rate until inflation is confidently on its way back to the government’s target of 2%.

Voices of Dissent

Not everyone is on board with the continuous rate hikes. Swati Dhingra, a member of the monetary policy committee, has voiced concerns that further rate increases might harm the economy more than they help. And there are stats to back this view. Recent data revealed a significant employment drop and a rise in the unemployment rate, signaling possible adverse effects of the rate increases on the job market.

The Inflation Puzzle

However, inflation remains a genuine concern for the Bank. Despite a drop from a peak of 11.1% in October 2022 to 6.8% in July, there are fears of it inching up again, especially with recent fuel price hikes. The Bank uses several metrics, such as core inflation and service-sector inflation, to gauge the situation. These figures reflect the domestic inflation scenario and are vital indicators for their decisions.

What’s Next?

One thing to remember is that interest rate effects don’t manifest immediately; they work with a time lag. So, the full consequences of the 14 prior rate hikes haven’t fully come into play. With a weakening labour market and declining house prices, it’s a complex situation.

While the upcoming rate hike seems almost inevitable, the direction in which rates move after that is uncertain. Some speculate that the next change might be a reduction.

Conclusion: What This Means for Property Investors

For those considering property investments or with existing mortgages, these rate adjustments directly impact your borrowing costs. An upward trend means higher interest on loans, which could influence decision-making in property investments. On the other hand, a plateau or reduction in rates can offer a more stable borrowing environment.