Bank of England’s inflation response ‘risks higher interest rates for longer’

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Thinktank Niesr says timid rate rise last week likely to make inflation more persistent feature of UK economyThe Bank of England is risking higher interest rates for longer after…

Thinktank Niesr says timid rate rise last week likely to make inflation more persistent feature of UK economy

The Bank of England is risking higher interest rates for longer after a hesitant response to rising inflation, according to leading thinktank.

In a searing critique of the central bank’s tactics, the National Institute of Economic and Social Research (Niesr) said a timid increase in interest rates last week was likely to mean inflation staying above the Bank’s 2% target until at least 2030.

The thinktank said inflation was likely to become a more persistent feature of the UK economy unless the Bank took tougher action.

The Bank’s monetary policy committee increased the cost of borrowing from 3.75% to 4% last week and hinted at another increase to combat inflationary pressure unleashed by the Iran war.

The director of the Niesr, David Aikman, urged the Bank of England to be more aggressive in tackling inflation, saying all the ingredients were in place for workers to demand inflation-linked salary rises.

“Inflation is set to rise above 4% in the new year, just as most pay awards for 2027 are being agreed, so the risk that it becomes embedded is rising.

“One further quarter-point rise is unlikely to be enough, and the longer the MPC waits, the more it will eventually need to do.”

UK inflation stands at 3.5%, well above the Bank’s 2% target, driven higher by the soaring cost of fuel. Oil and gas prices have risen sharply since the end of February, when the US and Israel launched their war on Iran.

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