Are interest rates on the way up again?
By Michael Race, Business reporter, BBC News
There’s nothing like talk of energy prices and potential higher borrowing costs to remind us that the summer holidays are over. Surging oil prices have been pushing up what drivers pay at the fuel pumps and eating away at household budgets for months, and concerns remain over whether the economic impact of the US-Iran war will drive the cost of living higher.
Citing the Middle East conflict and warning inflation was "set to remain well above" its 2% target for some time, the European Central Bank recently raised interest rates to 2.5%. Other central banks are also responding, with the US and the UK poised to make interest-rate decisions next week.
Up first on Wednesday is the US Federal Reserve, which has held rates steady between 3.5% and 3.75% for five meetings in a row. It last made a change – a rate cut – in December. But a strong jobs market and President Donald Trump saying he does not think oil prices will come down until the Iran war ends, which he expects to happen after November’s elections, has led many on Wall Street to bet on a rate hike this month.
Newly-appointed Fed Chair Kevin Warsh has remained tight-lipped on where he sees interest rates going, but his repeated comments that the central bank’s focus should be on slowing price rises has further fuelled expectations of an increase.
Economists at Deutsche Bank said recently that a rate hike is "the most likely policy outcome", noting comments from Warsh and other members of the Fed. Views differ somewhat, with Grace Zwemmer, US economist at Oxford Economics, expecting rates to remain unchanged, but almost universally a rate cut appears to be off the table.
Trump, though, is again pressing for lower rates. "The Fed Board, with its great new leader, must get smart – BE PATRIOTS for a change," he posted on social media last week.
Oil, gas and borrowing costs surge as fears over Middle East escalate
Higher energy prices can also make transporting goods more expensive and those extra costs can be passed down to consumers through steeper prices for the likes of food and other staples.
Central banks try to limit price rises with higher interest rates. By pushing up the cost of borrowing for things such as mortgages and credit cards, they seek to slow consumer spending and inflation. Higher rates also can give people incentives to save instead of spend. But it’s a balancing act, as higher rates can also encourage businesses to hold off on investing and hiring.
When the Bank of England meets later next week, it is expected to try to look both at current price pressures and the wider economic picture. Millions of UK households are set to see energy bills rise to the highest level for three years heading into winter.
