Inflation is a lazy excuse – it’s time for the Bank of England to cut rates

19 February 2025, 12:47

A rise in inflation will be frightening news for the millions of people in this country already struggling to afford the essentials - many of whom are also being hammered by high interest rates.

But higher inflation shouldn’t be used by the Bank of England as a reason to keep interest rates high.

The pace with which the Bank whacked up interest rates in response to previous inflation rises is still hurting people’s finances - through higher mortgage rates and higher interest payments on other loans. The Institute for Fiscal Studies estimates that 320,000 people were pushed into poverty between 2021 and 2023 as a result of mortgage interest rate rises.

There’s a risk that these new figures further encourage the Bank of England to keep interest rates higher for longer. This would be the wrong move, prolonging the financial pain households are feeling from the high interest rates of recent years.

Today’s inflation has partly been driven by factors like the increase in the bus fare cap from £2 to £3. While future inflation is likely to be driven by energy prices - Ofgem, the energy price regulator, is expected to increase the energy price cap in April by 5% because of a colder than expected winter in Europe and a run-down of gas supply.

Higher interest rates won’t help bring down costs of bus fares, which increased due to government policy, or energy bills which are increasing due to factors external to the UK. It will suffocate demand - when demand is not the driver of the higher inflation we are seeing.

Holding interest rates higher for longer will also make it more difficult for the government to invest in the things we need - higher interest rates means higher borrowing for the government as well as for households. Higher interest payments on government bonds means less space for investing in our crumbling schools, hospitals and public services.

The Bank needs to cut interest rates further and faster -  but they can’t resolve the problem of high inflation on their own, governments also need to take responsibility.

With another energy price hike looming, the government should help people now through targeted energy bill support funded by recycling the revenues from windfall tax on oil and gas giants, and increase our resilience for the future by supporting homegrown, renewable energy.

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Jaya Sood is a senior economist at the New Economics Foundation.

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