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The Bank of England (BOE) is facing the ultimate credibility test amidst the recent rate surge. For a long time, BOE has been viewed as a pillar of stability in the world of central banking. However, recent developments have shaken this belief. The looming historic interest rate hike has left many Britons on the verge of speculation about the extent of the economic repercussions.
Public confidence in the central bank has dropped significantly, with two in every five Britons (40%) disapproving BOE’s mannerisms in handling inflation. This figure has gone up from 34% that was dissatisfied in May. It is not a secret that the financial markets will be affected and investors may have to seek other alternatives like trading gold if the currency destabilizes. However, this does not exonerate BOE from the ultimate credibility test that it will face from the consumers following the historic interest rate hike.
A Test of Credibility
The Bank of England is facing the highest test of credibility since 2009. It is the first since after the 2008 economic crisis that BOE is on the verge of raising interest rates. The central bank is doing so as a response to the mounting inflationary pressures. In recent years, the country implemented ultra-low interest rates to stimulate economic growth to respond to global challenges.
Policymakers and economists in the country advising the central bank raised concerns about the rising tide of inflation. Inflation has surged beyond the target range set by the central bank, calling for actionable remedies to address this rising tide. The decision by the central bank to raise interest rates is viewed as a necessary step that can help control the rate of inflation to prevent it from getting out of control.
Therefore, from an economic perspective, there is justification for the central bank’s move. However, the consumers are set to experience certain difficulties.
Consumer Impact: Higher Borrowing Costs
One of the implications of the historic rate hike is higher borrowing costs for consumers. Variable-rate credit card debt, mortgages, and personal loans will be impacted directly by the increase in interest rates. This means that homeowners with variable mortgages will have their payments increased, thus, tightening the strained household budgets.
Many consumers in the UK have become accustomed to the low-interest rates. The reality that they are facing now is unprecedented and could have far-reaching implications. Apart from a lack of confidence in the central bank, consumers will be forced to reduce discretionary spending, which could further impact economic growth.
If the British pound stabilizes with this move, the effect could be felt further by exporters. British goods will be deemed as expensive, thus, reducing attractiveness in the open competitive market.
A Delicate Balancing Act
To regain public confidence, BOE is facing a delicate balancing act in navigating the dynamic economic landscape. The central bank has a responsibility to tackle the immediate threat of inflation. If it fails to address inflation, it could spill out of hand and destabilize the economy further causing worse effects than what consumers are expecting from the interest rates hike.
On the other hand, the road to recovery from the Covid-19 pandemic is still fragile. The central bank must exercise caution to avoid dampening investment and consumer spending, which could derail economic growth.
Credibility Concerns: Clear Communication is Key
Clearly, the BOE is tied between two aggressive economic options, which both have the potential to affect the economy severely. Clear communication could be used as the critical factor for maintaining credibility during this uncertain economic period. The central bank has an obligation to effectively convey the rationale that it is using to raise interest rates. It should also show its commitment to managing inflation within its target range.
Consumers should get an assurance that the BOE will implement the hike in interest rates gradually to give consumers and businesses time to adjust.
Final Thoughts
The Bank of England is facing a credibility test as it handles the inflation crisis and its preparation to implement the interest rate hike. Consumers are already alarmed at the direct impact this move will have on them. Therefore, the central bank must strike a balance between addressing inflation and hiking interest rates without causing much to the economy and consumers.
As the guardian of economic stability, BOE should clearly explain its steps to the public to regain public confidence as it sets to deter further inflation from sinking the economy.
