Does a hike in interest rates cure inflation? Or simply fuel it?

On 12^th May 2023, it was reported that banks had increased their interest rates to 4.5%, which is set to be the 12^th consecutive rise.

It seems the hope that the UK interest rates will fall is becoming more of an unreachable dream. Hikes continue to extrapolate the current economic imbalance, which disproportionately prejudices those who are trying to build their personal financial portfolios – whether by buying their first property or even selling an existing one. It also has a seismic impact on those who are just “surviving”, living payday to payday with panic and hardship as their daily companions. We are seeing the increased use of credit cards as a self-fulfilling pay day loan scheme.

However, fiscal opinion is changing; some commentators think that ever-rising interest rates actually harm both businesses and consumers simultaneously. How can businesses thrive, when consumers are being squeezed of the last droplets of their disposable income? Higher interest rates are an aged way of increasing prices to slow spending. However, prices have risen because of Covid-induced shortages in production due to the war in Ukraine and Brexit disruption. These price increases cannot be influenced by interest rates.

“Consumer threat is something we take seriously in this industry”. Vikki Brownridge, Chief Executive of StepChange Debt Charity, said “The steep jump in interest rates we’ve seen over the past 12 months has been a shock to household budgets, compounding financial difficulty for people who are already struggling to make ends meet. As time goes on, more mortgage holders will be facing the prospect of a new fixed rate deal or variable rate which will consume a larger proportion of their income, making it increasingly difficult to meet other financial commitments.”

The very pressures Vikki refers to caused by interest rates will ultimately lead to wage demands and thereby inflationary pressure. Some are arguing for government intervention such as price regulation. At present some areas of the economy are seeing rocket and feather pricing, whereby consumer suppliers raise prices sharply but reductions are very slowly implemented.

“The situation is becoming increasingly precarious for many people and widespread problem debt is a risk, particularly for financially vulnerable households. We would urge firms to be proactive in identifying and communicating with customers who might be falling into difficulty by offering tailored support and signposting to free debt advice.” (Credit-Connect).

My question to the FCA is – how will you manage the consumer needs, while ensuring businesses can thrive? How will you regulate and support funders in the face of continuing interest rate increases and higher demand for consumer forbearance?