The Bank of England is widely expected to raise interest rates again, potentially as soon as December, as inflation is forecast to hit 5% by next spring. Analysts anticipate a message of austerity from policymakers when they meet on 17 December, with Huw Pill, the Bank’s chief economist, confirming that more than one rate rise is almost certain.
This news is unwelcome for borrowers, especially during the festive season. A rate increase from 4% to 4.25% would make mortgage deals and business loans more expensive. The central bank predicts businesses will pass on higher costs to consumers, assuming they have the means to pay, despite evidence suggesting otherwise. Only households in the top half of the income scale have increased spending this year, largely by depleting their savings.
Consumers remain wary after the post-pandemic periods of greedflation and shrinkflation, recognizing when retailers and suppliers use inflation as an excuse to hike prices. The Bank’s business surveys have not detected widespread corporate price increases, but policymakers believe inflation will exceed the 2% target. The public sector, which accounts for 25% of overall consumption, could be a weak link, as government expenditure on goods and services will inevitably rise, with sellers justifying increases through various excuses.
Public sector organizations have significant purchasing power and could influence broader inflation deals within the business community. Policymakers expect consumers, government, and businesses to accept sellers’ demands, leading to higher pay demands from workers. However, if any of these groups resist, inflation may not reach the forecasted levels, potentially leading the Bank to have raised interest rates too high, stifling economic growth.