What will happen to interest rates with high inflation?

What will happen to interest rates with high inflation?

Hi Janet

Well, we all know that in inflationary periods rates rise. However, on this occasion we may be in a period or "stagflation" which terrifies central banks and markets. It is a phrase coined by a British Chancellor some decades ago, and notes a period where prices are rising but growth is slowing or not present at all. This provides a quandary for rate setters as you want to control inflation but need to stimulate the economy. Obviously, with the energy and cost of living crisis, the Bank of England (I'm assuming you are UK based) now has a difficult balancing act, and this will be an organic process as based on daily changing conditions, not least the Ukraine crisis.

We have to assume we are on a path to higher interest rates. The US are expected to raise rates several times this year, although not as much as previously expected. We will lag the US I suspect, but the overall shape will be an upward one. Perhaps it will be short-lived, but with so much money saved around the world, energy getting more expensive (which effects everything we buy of course) and labour rates increasing in most economies, I would say expect several increases in the foreseeable future, but probably not by large amounts.

I hope this helps.

Regards and good luck to you

Adam