Higher inflation higher interest rates?

Inflation continues to rise, will this lead to higher interest rates?.

Inflation continues to rise, with the Retail Price Index (RPI) rising 3.7% over the year to the end of January. This is not much of a surprise, as it reflects the 1 January VAT rise from 15% up to 17.5%. Plus higher oil rices also continue to impact.

Will this prompt the Bank of England to increase interest rates? Well I'm sure there'll be the usual headlines predicting it will, but I'm less convinced. While higher interest rates are the usual medicine for curbing inflation, these are quite exceptional times.

Hiking interest rates tends to cool inflation when prices have been pushed up by us all spending money like it's going out of fashion. But the main inflation drivers have been the VAT increase and higher oil prices, not consumer spending, so raising interest rates would have little, if any impact. Plus any interest rate rise would probably plunge us straight back into recession (if we don't anyway).

The way things stand I'll be surprised if we see a base rate rise this year, so I won't personally be rushing to lock in my mortgage to a fixed rate. I will however look to shift some of my savings to three year National Savings Index-Linked Savings Certificates.

For more details on protecting your savings from rising inflation please see my earlier article.

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