The Bank of England can’t afford to hike interest rates again
With inflation falling, the cost of borrowing rising and the economy heading into an election year, the Bank of England can’t afford to increase interest rates again.


The interest rate hiking cycle has ended - or that’s what it looks like anyway following the latest decisions from the European Central Bank, Bank of England and Federal Reserve.
In the past week, all of these central banks have announced they’re pausing one of the most aggressive rate hiking cycles in the history of independent central banks. The BoE’s monetary policy committee (MPC) held the base rate at 5.25% at their meeting yesterday, the second meeting they’ve kept rates constant.
Only the day before, the US Federal Open Market Committee voted to keep rates on hold for the second time, at a 22-year high of 5.25-5.50% (unlike the BoE, the Fed sets a range for its Fed Funds rate). And last week, the ECB held rates at 4%.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
All three of these leading central banks have hiked rates from zero over the past 18 months, as they’ve tried to bring inflation under control.
Inflation begins to fall
So far, the medicine seems to be working. Eurozone inflation dropped to a two-year low in October of 2.9%, from 4.3% a month earlier. Meanwhile, inflation dropped to 3.7% in the US for the 12 months ended September.
Here in the UK, inflation has proved tougher to control. Since CPI inflation reached 11.1% in October last year it has fallen by more than 4 percentage points, although it flatlined at 6.7% in September. Inflation has remained sticker in the UK due to the energy price cap, which works with a lag.
Unlike the US and Eurozone, where lower energy prices have already filtered through to consumers and businesses, the price cap is preventing prices from falling as fast here in the UK.
As energy is a big component of the inflation figures, this is something policymakers will be taking into consideration when setting interest rates.
Higher interest rates are starting to have an impact
Inflation is just part of the equation for central bankers. While The Fed, BoE and ECB all have a mandate to keep inflation under control, they don’t want to crush their respective economies at the same time. So they have a tough balancing act to practise.
That said, coming off the pedal too early could reverse much of the progress they’ve already made in the fight against inflation. BoE governor Andrew Bailey has said rates must stay, “sufficiently restrictive for sufficiently long”. He’s also recently added, “It’s far too early to be thinking about rate cuts.”
Across the pond, Fed chairman Jerome Powell has summarised the Fed’s stance as being “not confident we have reached sufficiently restrictive [financial conditions], but not confident we haven’t”.
The markets have a bit of a different view. The market is pricing in interest rate cuts starting in the second half of next year and is only assigning a slim chance to further rate increases from both the BoE and the Fed.
There are signs on both sides of the pond higher rates are starting to have an impact on economic growth. In the UK in particular, activity in the construction sector has fallen off a cliff and consumers are pulling back on spending as higher interest rates bite. It’s also more appealing than it has been for over a decade to save rather than spend (one of the main reasons why interest rates are so effective at controlling prices).
Higher interest rates mean it’s more expensive for companies and consumers to borrow money to spend and invest, which reduces demand, forcing businesses to lower their prices. While inflation remains high in the UK, shop price inflation has been falling, suggesting part of this equation is already playing out as businesses compete for customers’ shrinking spending power.
An upcoming election
The BoE will have this in mind when it’s thinking about interest rates going forward. If businesses have to fight for consumers' money, business activity in the economy will fall (as is already happening in the construction industry) and that could lead to a recession. Higher interest rates are already forcing the government, which relies of debt to fund the day-to-day running of essential services, to consider benefit and spending freezes.
With an election coming up, the government may start putting pressure on the BoE to cut rates, or at least hold off on any further rate increases to avoid sending the economy into a recession or driving harsh spending cuts in 2024.
All in all, there’s a chance the BoE could push rates higher in the coming months if inflation surprises to the upside, but with risks to the economy growing, and inflation falling in the rest of the world, (which will filter through to the UK over time) the central bank may decide to hold off on any further changes or even cut in 2024.
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.

Rupert is the former deputy digital editor of MoneyWeek. He's an active investor and has always been fascinated by the world of business and investing. His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.
Rupert has written for many UK and international publications including the Motley Fool, Gurufocus and ValueWalk, aimed at a range of readers; from the first timers to experienced high-net-worth individuals. Rupert has also founded and managed several businesses, including the New York-based hedge fund newsletter, Hidden Value Stocks. He has written over 20 ebooks and appeared as an expert commentator on the BBC World Service.
-
London Stock Exchange gets go-ahead to run Pisces private stock market
The Pisces market will allow investors to buy and sell shares in private companies. But how will it work, when will it launch, and who is allowed to use it?
-
Could landlords face National Insurance on rental income?
The Treasury is said to be considering a tax increase for landlords in an attempt to boost revenue in Rachel Reeves’s Autumn Budget
-
'Governments are launching an assault on the independence of central banks'
Opinion Say goodbye to the era of central bank orthodoxy and hello to the new era of central bank dependency, says Jeremy McKeown
-
Why investors can no longer trust traditional statistical indicators
Opinion The statistical indicators and data investors have relied on for decades are no longer fit for purpose. It's time to move on, says Helen Thomas
-
Live: Bank of England holds UK interest rates at 4.5%
The Bank of England voted to hold UK interest rates at their current level of 4.5% in March, as widely anticipated, after inflation rose to 3% in January
-
Bank of England cuts interest rates to 4.5%: full updates and analysis
The Bank of England voted to reduce the base rate by 25 basis points at the first MPC meeting of the year on 6 February. Full coverage as it happened from the team at MoneyWeek.
-
December interest rates: Bank of England keeps rates on hold
The Bank of England kept interest rates on hold at 4.75% in the final Monetary Policy Committee meeting of 2024. Full analysis from the MoneyWeek team.
-
Bank of England cuts interest rates to 4.75% – MPC meeting
Reporting from the Monetary Policy Committee November meeting. Full coverage, as it happened, from the team at MoneyWeek.
-
Do we need central banks, or is it time to privatise money?
Analysis Free banking is one alternative to central banks, but would switching to a radical new system be worth the risk?
-
Will turmoil in the Middle East trigger inflation?
The risk of an escalating Middle East crisis continues to rise. Markets appear to be dismissing the prospect. Here's how investors can protect themselves.