“Moderate” interest rate rise is the most sensible approach

Professor Vasso Ioannidou comments on the Bank of England's decision to raise interest rates.

The Bank of England has announced a small rise in interest rates from 0.1 to 0.25 per cent, the first increase since twice lowering it at the very start of the pandemic.

With inflation now exceeding five per cent – its highest for a decade – Andrew Bailey, Governor of the Bank of England has decided to act.

According to Professor Vasso Ioannidou, Professor of Finance at the Centre for Banking Research, Bayes Business School (formerly Cass), the announcement is both inevitable and sensible.

“This moderate increase is a proportionate and sensible response to rising inflation,” Professor Ioannidou said.

“Central banks need to ensure inflation and inflationary expectations are managed, and with the Bank of England’s target inflation rate of two per cent being more than doubled at present its intervention is required.

“As things stand at the moment, small gradual increases seem like the sensible approach.  This still means the developing situation with Omicron should be taken into account.

“If decreased levels of consumer spending as a result of the new variant are large enough to put significant downward pressure on prices, then further, incremental rises may not be necessary. I doubt this will be the case, however.”

Impact on mortgages

Professor Ioannidou does not foresee major issues with mortgages in the short term, but predicts further interest rate rises.

“A moderate interest rate rise on its own will not prove significant for most mortgages, but the problem comes with rising rates of borrowing at a time where household finances are being stretched by tax rises, possible loss of income from the pandemic and rising energy costs.

“It is likely we will see further small increases as consumer confidence continues to recover, but this could all be thrown out by Omicron depending on its severity over the coming weeks and months.”

All quotes can be attributed to Professor Vasso Ioannidou, Professor of Finance at Bayes Business School (formerly Cass).

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