Interest rate prediction: Will interest rates go up in 2022? Expert analysis

Interest rates ‘need to rise and will rise’ says Andrew Bailey

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Last week it was announced that the rate of inflation had increased to its highest level in nearly 30 years. Now, economists are warning the news could have a knock-on effect to the level interest rates could reach in 2022. So, what are we likely to see happen in the next year? What other factors can affect interest rates?

What is the Bank of England base rate?

Currently, the base rate of interest is at 0.25 percent after the Bank of England voted to increase it last December.

Between March 2020 and December 2021, the rate had been maintained at a record low of 0.10 percent, following two cuts at the beginning of the Covid pandemic.

Readers should note the importance of the rate as it determines the level of interest that the commercial banks charge us on financial products, such as mortgages.

How is the Bank of England base rate set?

The Bank of England’s monetary policy committee (MPC) sets and announces UK interest rate decisions eight times a year – roughly once every six weeks.

In a series of meetings, the nine members of the MPC, including Governor Andrew Bailey, debate and vote on what monetary policy action to take.

Typically, the decision they reach and the minutes of the meetings are published at midday on a Thursday.

Analysts then scrutinise these for clues that might suggest rate cuts or rises are on the way.

When is the next Bank of England interest rate decision?

February 3 2022 is the date for the next meeting which will decide the interest rate moving forward.

What’s likely to happen?

The Bank of England is keen to prevent inflation from rising any further, with its chief economist warning that more interest rate rises might be needed to curb inflation.

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Konstantinos Venetis is a Senior Economist at TS Lombard – a macroeconomic forecasting consultancy with headquarters in London.

Speaking to he said: “The BoE [Bank of England] looks poised to hike the policy rate to 0.5 percent next week.

“MPC [Monetary Policy Committee] members are on high alert for ‘second-round’ price effects taking hold as inflation and wage expectations keep pointing up while Covid fears are receding.

“Although the persistence of high inflation is largely supply-driven, policymakers feel they can still ‘do their part’ by switching to a stance that does not stimulate demand as much.

“At this juncture, inflation scares are a catalyst for stepping away from what are still very loose monetary settings relative to how far the UK economy has come since the depths of the pandemic in 2020. 

“In other words, BoE action is best viewed as overdue policy normalization rather than a tightening of financial conditions that will stifle real activity. 

“The economy is set to slow in 2022, however wages have already started to fall in real terms, which should allow inflationary pressures to ease in the second half of the year. 

“All this is consistent with a total of two or three rate hikes over the course of 2022 – less than what the market is currently pricing in – that take Bank Rate to 0.75 – 1.0 percent and pave the way for a reduction in the size of the Bank’s balance sheet as QE [quantitative easing] starts to unwind.”

What does the base rate mean for my money?

Lower interest rates

If interest rates are low, this makes borrowing cheaper.

Consequently, this encourages individuals and companies to borrow and spend more money.

In this scenario, the rate of inflation tends to rise, meaning the purchasing power of your money is falling.

When inflation rises swiftly it means that goods and services become more expensive quicker.

Higher interest rates

Alternatively, if interest rates are high, people would rather save because they get a higher return and borrow less because it’s expensive.

Here, the rate of inflation is likely to fall which in turn means the purchasing power of your cash will remain relatively consistent.

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