Budget 2021: Rishi Sunak's plans to ease cost of living crisis are set to be derailed by rising interest rates

Asia's Tech News Daily

UK interest rates are set to start climbing again in the near future, the head of the Bank of England has signalled in a move that will dismay Rishi Sunak.

The Chancellor is currently putting the final touches to his Budget and spending review which will be unveiled in Parliament next week.

He has made it clear one of his main concerns as the British economy emerges from the Covid-induced recession is that inflation could spike – raising the cost of living and pushing the Bank to increase interest rates.

Andrew Bailey, the Bank’s Governor, said that the rise in global energy prices made it more likely that inflation would remain above the 2 per cent target for a prolonged period of time.

He told a gathering of global finance ministers: “Monetary policy cannot solve supply-side problems – but it will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations. And that’s why we at the Bank of England have signalled, and this is another such signal, that we will have to act.”

The Bank’s monetary policy committee is considered likely to raise rates from their current record low of 0.1 per cent at a meeting in either November or December. It would be the first rate rise since 2018, after the level was cut twice in March last year following the start of the coronavirus crisis.

Mr Sunak has said that he is intensely worried about a string of rate hikes pushing up the cost of interest on the national debt – although economists point out that it has never been so cheap to service the debt. He is likely to emphasise at the Budget that continued spending restraint, and possibly extra tax rises, will be needed to reduce the deficit – rather than adding stimulus to help families with the cost of living.

An increase in interest rates would also push up the cost of servicing mortgages, including for millions of homeowners who have never known a base rate higher than 0.75 per cent, which could worsen the living standards squeeze.

Mr Bailey’s intervention could hardly have come at a more awkward time for the Chancellor.

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