Interest rates in the UK have been kept at record lows of 0.1% since March 2020, as the British economy weathers the storm of the coronavirus pandemic.
At the height of the crisis, rates were initially cut from 0.75% to 0.25%, and slashed further a week later to calm the markets. Central banks across the globe also undertook asset purchases to support economic activity.
As restrictions now ease and the world moves back to some form of ‘normality’, there has been mounting speculation that the Bank of England (BoE) will hike rates, for the first time since 2018, before Christmas to combat rising inflation.
This comes as the country suffers from fuel shortages and supply chain disruptions, which have resulted in higher costs for materials and components.
Job vacancies are also at record highs, with unemployment falling and the number of payrolled employees back to pre-pandemic levels.
Some of the bank’s monetary policy committee (MPC) members are already adding pressure to increase the cost of borrowing earlier than previously expected, in a bid to counteract the issue of higher, and potentially longer lasting inflation.
“The market has been rapidly pricing in an interest rate rise in recent weeks, with the chances of a hike this year now standing at two in three,” Laith Khalaf, head of investment analysis at AJ Bell, said. “That seems a little rich, seeing as the last time the UK’s interest rate setting committee met, they unanimously agreed to keep interest rates on hold.”
He added: “The UK now looks firmly on the path to higher interest rates. The question is how quickly the central bank takes us there.”
Watch: What is inflation and why is it important?
In an interview with the Yorkshire Post over the weekend, governor Andrew Bailey raised concerns about inflation and said he was uneasy about consumers starting to see the rise as a permanent feature.
Last month, Threadneedle Street said that CPI information was projected to rise temporarily in the near term, to 4% in the fourth quarter of 2021, owing largely to developments in energy and goods prices. It warned that since the August MPC meeting, the pace of recovery of global activity has showed signs of slowing.
But it said CPI inflation was expected to fall back to close to the 2% target in the medium term.
Meanwhile, MPC member Michael Saunders told the Sunday Telegraph he expects the cost of borrowing to go up “significantly earlier” than currently forecast.
"You can be aggressive in providing stimulus when it's needed. But the flip side of that is to be willing to take away some of that stimulus when inflation risks are no longer to the downside but more to the upside," Saunders said.
Market watchers have previously warned that an interest rate rise at the wrong time could tip many borrowers over the edge into more debt and put the breaks on recovery. It would also push up bills for millions of households on variable mortgages.
However, recent soaring gas prices and price inflation due to supply chain issues have complicated the picture in the future rate path.
The Bank of America on Monday predicted that the BoE will raise rates in December. It expects a 15 basis point rise before Christmas, which would take interest rates up to 0.25%, followed by a 25bp hike in February.
It had previously predicted the first rate rise would come in February 2022.
“BoE speakers have so far focused only on inflation rather than the growth risks from recent developments. They appear ready to hike soon,” the Bank of America said.
“We choose a December hike because the BoE will have October labour market data at that point, and Saunders noted December pricing. We assume they also in December signal they plan to hike again, to 0.5%, at the February meeting if the post-furlough labour market data remain strong enough.”
Watch: Will interest rates stay low forever?