Martin Weale, the “rebel” and one of the 9 members of the Monetary Policy Committee of the Bank of England, remains confident that interest rates should be raised, despite the fact that inflation is running well below the Bank’s 2pc target. Although many argue that increases in interest rates should wait, Mr. Wheale believes that it should increase immediately to reduce the risk of having to raise the interest rate even higher in the future to contain inflation.
Raising interest rates will generate different effects to the economy. Firstly, it will increase the costs of borrowing. Businesses often seek external sources of finance to aid their ventures, and an increase in interest may make them more hesitant to do so. This may also discourage people from saving their money. Secondly, mortgage interest payments will also be increased. A small percentage increase in interest rates can result in a large cost increase and impact on consumer’s disposable income. Lastly, increased interest rates can also lead to higher taxes in the future as it increases the cost of government interest payments. These are the potential effects of raising interest rates that need to be considered.