A Bank of England policymaker has given the clearest signal yet that interest rates may rise before the end of the year amid rising concern over inflation.
Michael Saunders, an external member of the Bank’s ratesetting monetary policy committee, said in an interview at the weekend that a rise in interest rates could come “significantly earlier” than previously anticipated.
The Bank has until recently been reluctant to tighten policy prematurely for fear of jeopardising the economic recovery. However, rising energy prices and product shortages are pushing up inflation, causing markets to be increasingly sceptical about the Bank’s claim that price rises will be short-lived.
Saunders told The Sunday Telegraph that inflationary pressure “could become more persistent unless monetary policy responds”. He added: “I’m not in favour of using code words or stating our intentions in advance of the meeting too precisely. The decisions get taken at the proper time. But markets have priced in over the last few months an earlier rise in Bank rate than previously and I think that’s appropriate.”
Markets are now pricing in roughly a one in four chance of a 0.25 percentage point interest rate rise at next month’s Bank meeting. The base rate currently stands at a record low of 0.1 per cent. By the end of next year rates are expected to rise to 0.75 per cent, their highest level since March last year.
Rising energy prices and labour shortages are likely to push the consumer prices index above 4 per cent, where it will stay until the middle of next year, according to forecasts. A rise in rates would help curb escalating price increases but would put extra pressure on households and businesses by increasing the cost of their debt.
Close to a dozen energy companies have collapsed as wholesale gas and electricity prices hit record highs in recent weeks. Pure Planet, a residential renewable energy supplier backed by BP, is on the verge of becoming the latest casualty. The company is said to have approached the regulator Ofgem about entering the Supplier of Last Resort process, according to Sky News.
Households are now bracing themselves for a difficult winter ahead. According to an index compiled by the Centre for Economic and Business Research and YouGov, consumer confidence plummeted last month as the fuel crisis and the prospect of higher inflation eroded the last six months of gains.
The report found that household confidence fell by 2.3 points to 110.5. The decline was driven by growing pessimism over finances as respondents anticipated a steep rise in energy bills. The sub-index for household finances dropped by 10.7 points to 90.9, the second largest fall on record after the 16.5-point fall seen in March last year.
A separate report by the accountancy firm BDO found business output fell to its lowest level for six months, with inflationary pressure at a ten-year high.