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Given the debate in the last week about whether economic forecasts are reliable predictions, it’s timely to see the Bank of England dropping heavy hints that the inflation predictions its Monetary Policy Committee made in November have already turned out to be wrong. The MPC and Mark Carney are now of the opinion that interest rates may need to rise sooner and by more than they expected, while growth will also be higher. Caveat predictor.

If they’re right (this time), that could have quite sizeable financial and psychological effects on a lot of people, and therefore political effects on the country as a whole. I wrote back in October about the potential for a double-whammy impact of higher rates on an economy that is debt-heavy but savings-light, and on a population who have been able to take rock-bottom rates for granted as a fact of life. For some (hopefully few), rate rises will come as the straw that broke the camel’s back – but for many more they will be more survivable but still come as a shock.

Interest rate rises aren’t inherently bad, of course. They’re tools, not moral actors – they’re often a symptom of welcome growth, and they help to stave off ruinously excessive rises in inflation. They are painful for borrowers while helping savers, but, as is so often the case, it’s likely that those who lose out will make more noise about it than those who benefit.

Political opportunists, like those who seize desperately on any opportunity to complain about Brexit, will suggest that any negative effects of higher rates are down to leaving the EU. Some inflation undoubtedly is related to the fall in sterling’s value against the dollar, but to confine discussion solely to that factor would be a mistake. As my brother writes in today’s Daily Telegraph:

‘The jump in the cost of imports appears to be past its peak and the recent strengthening of the pound may help reverse some of this effect. However, other pressures are simultaneously pushing prices in the other direction. Pay is rising faster than workers’ productivity, putting pressure on companies to raise prices. Stronger economic growth means domestic price pressures will rise and the higher oil price is also slowing the fall in inflation.’

There’s a contributory factor from across the Atlantic; while the Trump White House has struggled to get much done, it has successfully passed its tax changes. The UK will likely feel some knock-on benefit from that $1.5 trillion tax cut, but it will also contract some of the inflationary effect, too.

Much of this is out of the control of the British Government. Westminster doesn’t set Washington’s tax policies, neither does it control the rate of inflation in UK markets, nor can it set interest rates on Threadneedle Street. And yet there are political implications, and there will be questions from voters, like it or not. The answer for ministers is simply to prepare the ground; that means getting out ahead now to set out the narrative of what is causing inflation and inviting higher rates. If the Government doesn’t do so, and soon, you can be sure its opponents will do so instead.

36 comments for: The Government needs to present a persuasive explanation of why interest rates are set to rise further

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