Faisal Islam: How high will interest rates go?

Why have they raised now? High and rising inflation risks a further cycle of self fulfilling expectations of rising prices. It hasn’t been seen so far, however. The war has lasted for 9 months, and led to oil prices used in the forecast averaging $108 a barrel.

And yet on the day they have announced the rate rise, the oil price is actually 13% lower than that having fallen in the run up and after the US mid term elections, reflecting expectations or guesses that President Trump will now retreat or deescalate from the Iran war.

The other notable factor is that the UK economy is performing much better than forecasts and expectations. This is underlined by the Bank of England’s latest forecasts.

Growth has been 0.6%, and 0.5% in the first two quarters of the year. It is heading for 0.7%, the Bank said, between July and September, before slowing in the three months to the end of the year. Unemployment has stabilised, actually falling a little.

Some of this has fed through into a better performing currency, with sterling at its highest level since the Brexit referendum, when measured against a basket of currencies. This can help rein in inflation by making imports cheaper.

So, this is an unusual type of uncertainty. Even the expected further rise, probably in February next year is conditional on the war continuing.

The Bank of England stopped waiting for President Trump’s war to end today, but perhaps the Democrats’ resounding victory in the US midterm elections will stop the inflationary wave? The Bank has thrown a tentative first dart, and there is probably another to come.