Interest rates: short-term pain for long-term gain?

As the Bank of England raises interest rates by half a percentage point – the highest jump since 1995 – Dr Nikolaos Antypas looks at what this could mean for the UK economy in the latest Henley Insight.

The Bank of England (BoE) raised interest rates from 1.25% to 1.75% last week, the largest raise for over two decades. The increase in rates comes as a response to the high inflation prints, which reflect excess demand for products and services against available supply. Since borrowing is expected to become more expensive, the demand for products and services is expected to decrease as well, relieving the demand pressure (which can change fast) on supply, which is usually less flexible.

The move by BoE is is expected to have the intended effect over time, but this may come at a cost for the average consumer, and it will affect households with lower discretionary income even more. The increased energy bills and rising food expenses have already left UK households with a lower buffer, if any, to absorb increased costs; the expected rise in mortgage rates and, thus, monthly payments can stress household finances even further.