The Bank of England’s rate hold is good news for John Healey

Energy prices have been on the rise again in recent weeks and fears of another inflationary shock are, again, on economists’ lips. For now, though, the Bank of England has just voted six to three to keep interest rates steady at 3.75 per cent.

The decision, just announced by the Bank’s Monetary Policy Committee (MPC) is a relief to Chancellor John Healey and mortgage holders throughout the country, who are beginning to feel the effects of the ending of the MPC’s cutting cycle. Analysis from Moneyfacts – who track the mortgage market – finds that the average new mortgage rate is now 5.59 per cent, well above the 4.9 per cent it sat at at the beginning of this year. If a 0.25 per cent hike had been the way the MPC went, Moneyfacts reckon it would increase average mortgage payments by around £450 a year. 

Everyone’s hope then will be that the MPC continues to sit it out for the rest of this year and decides not to make any interest rate hikes (the market now expects at least one). That hope could be forlorn though thanks to two factors in today’s decision.

Though a hold was widely predicted, the vote came in closer than had been expected. Of the three dissenters who voted for a hike to 4 per cent, one was Huw Pill – the Bank’s chief economist. While Pill was reassured that the money supply is not growing too quickly, he remains ‘concerned’ about ‘insidious second-round effects' where employees demand pay rises and employers hike prices to match. He felt the Bank needed to offer a ‘clear and unambiguous signal’ that the MPC was willing to address upside inflation risks. You have to start to worry when the man paid by the Bank to get this stuff right – more than anyone else – thinks his colleagues are making a wrong move.

Second, the MPC’s report that accompanied today’s vote predicts that inflation will rise to 3.2 per cent later this year as energy prices continue to have an effect – mainly on fuel and food. More worryingly though, and agreeing with Pill, the report warned that there is a risk that the energy price shock makes inflation even stickier thanks to higher inflation expectations. And worse still – we won’t know that we’ve got stuck until we’re already in the quagmire. 

In the end it will come down to how the situation in Iran evolves. But as the Institute for Public Policy Research has just warned, Britain is heading towards what could be our most expensive winter since 2022, with a double whammy of high energy bills and mortgage costs heading for families. Let's just hope Pill and his fellow hawks have got this one wrong.