Bank of England says interest rates rises 'necessary over coming months' to contain inflation

ITV News Business and Economics Editor Joel Hills reports on what effect rising inflation levels will have on interest rates

In the end, it feels like it almost came down to a coin toss.The Bank of England has decided to keep Bank Rate on hold at 0.1% but it is stating very clearly that interest rate rises are imminent.The pace at which prices are rising is cause for concern.

Bank of England Governor Andrew Bailey explains why interest rates might rise in the future and by how much. Will there be a return to high interest rates before the financial crisis?

Three months ago the Bank forecast Consumer Price Inflation would peak at 4%, it now thinks it will hit 5% next April - the highest forecast since 2008.“It will be necessary over the coming months to increase Bank Rate in order to recruit CPI inflation sustainably to the 2% target,” warns the Monetary Policy Committee’s latest minutes.

Inflation is being driven higher on the back of rising energy prices and supply disruption.The market price of gas has surged, so too has the price of oil. Meanwhile global supply chains are struggling to cope with the increase in consumer spending - on goods in particular - as lockdowns have lifted.

Three months ago the Bank insisted these factors were transitory, it now believes they are much less transitory. Energy bills will peak higher than it previously thought and supply “bottlenecks” will persist until the end of next year.

"The UK economy is being hit by two shots, Brexit and Covid, does that explain by the Bank of England is limbering up to raise interest rates sooner that Federal Reserve or the European Central Bank?" Joel Hills asks the Bank of England Governor Andrew Bailey

Increasing Bank Rate - and therefore the cost of borrowing - will not reduce gas and electricity bills, it will not help companies to fill vacancies or bring down international shipping costs.The Bank presumably hopes that higher interest rates does will head-off the danger of a spiral of climbing prices and wages. The message to employers would be: do not offer inflation-busting pay rises.And who could be forgiven for asking for a pay rise? The pound in people’s pockets is buying less.

For the good of the economy, try not to ask for an above-inflation pay-rise, Andrew Bailey advises

The Bank forecasts that prices will continue to out-strip pay and that real post-tax labour income will fall in 2022 and 2023.The UK economy is being hit by two economic shocks. One has been caused by Covid, the other by Brexit.

In the short-term, the Bank is saying there is nothing it can do to prevent the high inflation these shocks are causing. What it believes it can do is ensure this painful period is short-lived.The consolation here is the prospect of better times ahead but there’s no sign in the Bank’s Monetary Policy Report of the “high wage, high productivity” economy that Boris Johnson is promising.It’s also interesting that the Bank of England is limbering-up to raise interest rates rather sooner than the other big central banks.In the United States, the Federal Reserve is sounding more hawkish but markets don’t expect interest rates to rise there until the end of next year.The European Central Bank isn’t expected to move until 2023.The Bank of England looks like a bit of an outlier.