22 October 2021

Is the Tory electoral coalition ready for an interest rate rise?

With the Bank of England’s chief economist warning inflation could hit 5 per cent, monetary policy is about to get a lot more interesting.

By Stephen Bush

Illustration by Gary Waters / Ikon Images

Inflation is likely to hit 5 per cent, the Bank of England’s chief economist Huw Pill has said in an interview with the FT’s Chris Giles.

Although the general expectation is still that the increase in inflation is a transient spike rather than a runaway trend, it also means, in Pill’s view, that November’s meeting of the Monetary Policy Committee, which sets interest rates and of which Pill is a member, faces a “live” decision on whether or not to increase rates to tackle inflation.

One of the most important and neglected political facts of our time is that the Conservative electoral coalition – from the couples in their late twenties with a mortgage in the West Midlands, to the wealthy pensioner who owns a house outright in Surrey, to the not-so-wealthy pensioner in a council house or a home of their own in Hartlepool – is made up, for the most part, of people who haven’t done too badly from the era of ultra-low interest rates.

One politician who understands that is Rishi Sunak, which is one reason why he is so reluctant to utilise the headroom that low-interest rates have granted governments – because the last thing that the Tory electoral coalition needs is a rise in rates.

Now, we shouldn’t exaggerate the scale of the rise or its immediate impact: we’re talking for the moment about a return to pre-Covid interest rates of 0.75 per cent, and a much slower increase to anything resembling pre-financial crisis interest rates. But it’s striking that Pill is saying that monetary policy has now entered a “different phase”: the era in which the aim of the Bank was to stimulate growth with ultra-low rates and quantitative easing is now over, and that monetary policy will, as a result, become much less – in Pill’s words – “boring”, and the Monetary Policy Committee will itself become more divided.

Of course, a less boring era for monetary policy may well leave Chancellor Sunak and the rest of the government remembering that to live in “interesting times” was traditionally a curse and not a blessing.