The Bank of England should raise interest rates on Thursday in order to “protect credibility” and stamp out any risks of inflation spiralling out of control, top economists have said. 

’s Shadow Monetary Policy Committee, which consists of leading economists across industry and academia, has called on the Bank to lift interest rates by 25 basis points from 3.75 to four per cent. 

Our committee said there were growing risks of higher energy costs becoming embedded within the UK economy, spilling into rising consumer prices and intensifying wage pressures. 

Out of nine members on the Shadow MPC, six economists said interest rates should rise by 25 basis points, with each participant responding independently of their respective organisations. 

Top City researcher Kallum Pickering, plus the former Whitehall economists Vicky Pryce and Ben Ramanauskas, called on the Bank’s official committee to leave interest rates unchanged. 

“Increasing interest rates now would do little to tame inflation while piling even more pressure on households and firms,” Ramanauskas said, adding that there was little evidence of demand pressures boiling up in the economy. 

Pickering separately argued that the Bank should “look through” temporary effects, with data from recent history suggesting that a repeat of spiralling inflation in 2022 was unlikely. 

Interest rates hold could ‘undermine confidence’

However, a majority of economists argued that rising inflation, which is expected to exceed four per cent within months, presented a risk to the Bank’s target to maintain price stability and hit its two per cent price growth target. 

Barclays chief UK economist Jack Meaning said holding rates “risks unsettling expectations and undermining confidence in the Bank”. 

However, he said that given evidence for second-round effects emerging (when prices push up wage bargaining in a spiralling effect) was weak, the Bank should make it known that it was not expecting to raise interest rates to the same extent predicted by markets. 

Jessop also argued that leaving rates unchanged in a “surprise” call would increase uncertainty levels, which could put markets on edge. 

Anna Leach – Institute of Directors, chief economist

Leach said there was a “greater risk” of rising inflation becoming embedded in wage and price-setting behaviours as energy price had remained higher. She said the risks were “crystallising” given inflation exceeded expectations, more firms expected to raise prices and business margins were narrowing. 

“The living and minimum wage rates for next year that were confirmed in the Budget sit above expectations for average wage growth next year, and risk pusher up broader wage pressures,” Leach said. 

“A small precautionary rise remains a sensible choice.”

Ben Ramanauskas – Policy Exchange, senior research fellow in economics

Ramanauskas said the Iran war had created a supply side shock “which the MPC cannot and should not try to respond to”. 

He said that a weakened labour market, as shown by higher levels of unemployment and low job vacancy numbers, along with low business and consumer confidence, meant there was “no evidence of excess demand in the economy”. This was further evidence by “normal levels” of money and credit supply growth, he said. 

“This is not 2022 but policy makers risk acting as though it is by raising Bank Rate in an attempt to salvage their reputation,” Ramanauskas said.

“Increasing interest rates now would do little to tame inflation while piling even more pressure on households and firms. The prudent response from the Bank is to hold now while signalling that it’s prepared to raise or lower Bank Rate.”

Jack Meaning – Barclays, chief UK economist

While Meaning said current evidence shows there would be “limited spillovers” from the energy price shock, there were risks around perceptions of the Bank of England’s actions. 

He said that higher borrowing costs faced by households and businesses would already weigh on growth and inflation in the medium term, which would come “just at the point that markets expect the energy shock to be unwinding and pulling down further on inflation”. He suggested that inflation could undershoot the Bank’s two per cent target. 

However, Meaning concluded: “With inflation set to exceed four per cent in the coming months, holding rates at this stage risks unsettling expectations and undermining confidence in the Bank’s commitment to its target.

“A modest hike now would protect credibility and buy time to assess 2027 wage settlements and the April 2027 energy price cap. Crucially, I would be clear at this meeting that, without stronger evidence of second-round effects, this increase should not be seen as the start of the more material tightening cycle the market appears to be expecting.”

Jagjit Chadha – professor of economics, University of Cambridge and former NIESR director

Chadha said that while the UK’s economic supply was “sclerotic”, the addition of the latest shock could have “the capacity to scar the economy and widen inequalities”. This could make the case for “some gradualism in monetary policy responses”. 

Chadha said that the series of issues facing the UK economy in the last few years gave rise to a “wide perception with the public and in financial markets that monetary policy credibility has been undermined this decade”. 

He said that the Bank had overseen inflation come below or at target for only a few months in the last five years, “scarcely” kept interest rates above price growth and had to make decisions when a “cost of living crisis” had added to spending pressures and “amplified the probability of a fiscal crisis”. 

Given the range of financial risks facing the UK economy, he argued that the “primary duty” of the Bank of England was to maintain price stability. 

“In our efforts to fine tune the economy, we have shifted markedly from that position. Adopting a path for higher rates alongside clear warnings on fiscal risks and inflation momentum is a priority.”

Julian Jessop – Independent economist

Jessop said the argument that policymakers should “look past ‘temporary shocks’” had “surely worn out by now” as inflation had raced past the two per cent target for most of the last five years. 

He also noted that improved activity in the UK economy and some stabilisation in the labour market meant a single rate rise was “therefore less likely to trigger a recession”. 

A series of interest rate hikes priced in by markets would be “more than enough to bring inflation down”, with a Bank decision to tighten monetary policy helping to “safeguard its credibility, then explain why only limited further increases may be needed”. 

He said: “Handled well, this approach could ease upward pressure on mortgage rates and the cost of government borrowing. In contrast, if the Bank surprises the markets by leaving rates on hold this week, more credibility would be lost and uncertainty could actually increase.”

Kallum Pickering – Peel Hunt, chief economist

Pickering said that monetary policy should “respond to persistent domestic inflation, not mechanically offset an external price shock”. 

He said that while higher international energy prices would push inflation higher, there was little justification for tightening monetary policy given “moderate” money supply and nominal GDP growth, a weakened labour market and “already restrictive” financial conditions across markets. 

The economist argued: “This is not 2022, when excessive monetary and fiscal stimulus had generated strong nominal demand before Russia invaded Ukraine. Better parallels are 2008 and 2011, when oil-price spikes temporarily lifted inflation and the Bank looked through them. That should be the guiding principle today.”

He said the main lesson from spiralling prices earlier this decade was that the Bank should not “ignore” signs that the shock had embedded itself in the UK economy. Pickering said the Bank should signal that while it could tolerate a “temporary” rise in inflation, it “stands ready to tighten if significant second-round effects emerge in wages, expectations or underlying domestic prices”.

Katharine Neiss – PGIM Fixed Income, chief European economist

Katharine Neiss said that the UK economy had been “surprisingly resilient”. She said growth had in part benefitted from mass US investment on AI. Inflation, she added, was a “touch firmer”. 

As a result of rising pressures in the wider economy and the “risk of escalation” between warring parties in the Middle East, plus pricing pressures on food and across supply chains, the Bank should increase borrowing costs. 

“A moderate rise in interest rates will help guard against gathering momentum in underlying inflation,” Neiss said. 

Ruth Gregory – Capital Economics, deputy chief UK economist

Gregory said the risk of price pressures becoming embedded in the UK economy had increased even if it was “too early” for effects to appear. This comes as energy prices continued to rise, the labour market was recovering, and inflation was on course to rise 

She said a 25 basis point hike in interest rates was “warranted” in order to defend the economy against risks emerging. 

She also expected the Bank of England to raise rates “by only a further 25bps after this meeting, taking Bank Rate to 4.25 per cent”, which would be below the five per cent rate priced in by investors.  

Vicky Pryce  – Centre for Economics and Business Research, chief economic adviser

Pryce said the Bank of England should hold interest rates at 3.75 per cent given wage growth “remains subdued” and higher prices “mostly reflect the impact of energy costs over which one has little control, rather than excess demand”. 

She said higher interest rates would have little effect on stamping out inflationary pressures and instead hit growth. 

“The US Fed and the European Central Bank wisely paused last week as they saw little sign of inflation spreading outside the energy sector,” Pryce noted.