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“Stubborn inflation suggests harder action was needed,” LCP’s Steve Hodder comments on interest rate rise

Investment Economy

Commenting on the latest interest rate rise from the Bank of England, Steve Hodder, Investment Partner at LCP, commented: “The Bank of England is coming under increasing pressure to end its rate rising approach. To some, it has started to act like a person with only a hammer, where every problem looks like a nail.”

“But whilst inflation remains stubbornly high, this isn’t an argument against the policy. We don’t know where inflation would be if the Bank hadn’t acted. If anything, stubborn inflation suggests harder action was needed.

“Some are questioning whether higher rates work now the majority of UK homes are owned without a mortgage. Whilst this has lessened the direct impact, the meaningful house price falls we are now seeing pour cold water on “feel good factor” spending, even for those without rising mortgage costs.

“And rising rates impact business borrowing, expansion plans and ultimately jobs - also impacting consumer spending even for those without significant borrowing.

“The key remaining question is whether the Bank can successfully balance the use of its hammer - there is a real risk of over-tightening causing a deep recession, in particular given the lagged effects of increased rates.

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