Pressure builds on Bank of England’s Bailey for yet another bumper rate rise

There is good cause for a degree of caution. 

Ellie Henderson, economist at Investec, expects most of the nine MPC members will vote for a 0.25 percentage point rise with only a few hawkish policymakers opting for a larger move to squash inflation.

“We think the UK economy will go into recession at the end of the year,” she says.

“This will help bring inflation back down, but the question is how long it takes to get inflation back to that 2pc target and how hard does the Bank of England have to tighten the screws to help that path.”

Huw Pill, the Bank’s chief economist, said it is important to strike “a balance between ensuring inflation returns to target, and containing the costs that measures needed to ensure that return impose on already vulnerable households and businesses”.

Swati Dhingra, a relatively dovish MPC member, last week said the higher cost of money “is already starting to add to ongoing pressures for families that are renting or negotiating in the mortgage market”.

Deciphering the effect of past rate rises on the economy is crucial. 

Traditionally, policymakers believe it takes between 18 and 24 months for rate rises to fully feed through to the wider economy, as higher borrowing costs gradually constrain household and business spending power and so flatten inflation.

It is only 18 months since the Bank stopped its pandemic-era QE and threw monetary policy into reverse, so most of the effect on inflation has yet to be felt. 

Meanwhile, raising rates now would not be expected to affect inflation fully until late 2024 or into 2025. Even this usual rule of thumb may be out of date. 

On the eve of the financial crisis, when rates were last at these levels, around half of mortgages were at fixed rates. This meant half of those with home loans felt the effect of higher borrowing costs immediately.

Now, only around 15pc are on variable rates, so the vast majority of mortgage borrowers are insulated from the extra cost for some time. This makes Bailey’s job more difficult.

It raises the risk that the Bank will increase rates, see little effect and so raise them again – only to find the cumulative effect hits much later and more powerfully than expected.