Interest rates: Borrowing costs set to rise as Bank sets new rate

The Bank of England is playing catch up with interest rates and should have started raising them last year, a former member of its Monetary Policy Committee has said. Andrew Sentance tells BBC Radio 5 Live interest rates should already have been around 3% by now in order to combat inflation (the rate of which prices rise per year – currently at over 10%). He says that while much of soaring inflation rates are down to global factors like soaring energy prices and rising food costs, some of it is within the UK’s capacity to control; like rising wages and costs. Sentence, who served on the nine-member committee which votes on interest rate decisions from 2006 to 2011, explains that interest rate rises serve to reduce people’s spending and therefore slow down the rate at which prices rise to contain inflation. However, this process “takes a while” and is not going to swiftly bring down the rising cost of living, he cautions. Sentence notes that 3% interest rates are not a particularly high level in historic terms, but is above what people have become accustomed to over the last 13 years. Acknowledging the pain these rate rises will cause people, he says the Bank of England’s job is to contain inflation first and foremost to prevent rapidly rising prices becoming embedded in the economy long term.