A rise in interest rate, what will happen?

Photo by Marco Gattello

Thursday 16th December will sign the end of the lowest interest rate in the UK’s history. The Bank of England will revisit the rate due to the inflation estimated to rise above 5% in the next Spring. A speculative view on the topic might show an increase from 0.1% to 0.25% by the monetary policy committee (MPC). A more drastic approach could be to take the interest back to 0.5% as it was in the period between 2009-2016 but still, it’s speculation.


History data from the Bank of England

Why did the BE decide not to increase the interest rate now?

In an interview dated 5th of November, Andrew Bailey (Governor - Bank of England) explains why the interest rates have not been raised already:

“… our latest forecast we think … [inflation] … will probably peak sort of Spring next year and then start to come down around 5%. What we have signalled today ... is that we do think that interest rates will need to rise that the official rate will need to rise. We haven't done it today (it was a very close call)... and the reason we haven't done it is because we still need in our view to see hard evidence particularly of the state of the job market in this country, that's important.”

It may be counterintuitive but the furlough plan that ended in September is blurring the view on our national employment. We need a more detailed picture.

UK’s economy today

[Data from the Office of National Statistics’s website]

Let’s take a step back and check how the situation was before COVID. UK’s GDP was £565,109 m in 2019 Q4. When COVID happened it plummed to £549,856m in 2020 Q1, fell to £442,274m in Q2 and then recovered to £519,390m in Q3 the same year. It took until 2021 Q3 to raise to £553,412m, almost back to the pre-crisis value. So looks like our economy is almost back to the pre-covid era, but we can’t have the full picture until the Q4’s data is released on the 22nd of December this year. Now let’s dive into the labour market.

UK’s Employment and Unemployment, time period June-August 2021

The employment (all aged 16 to 64) rate was estimated at 75.3%, so -1.3pps than during Dec 2019 - Feb 2020, but +0.5pp than the previous Quarter.

The unemployment (aged 16 years and over) rate was 4.5%, so +0.5pp than during Dec 2019 - Feb 2020. To put things in perspective, the 2008 crisis had an unemployment rate of ~8%.

It’s hard to draw a clear picture if we consider other data, such as the increase in inactive labour and part-time workers. One thing for sure is that young people (16 to 24 years) have been particularly affected by the pandemic. However, on a positive note, there was a record increase in the employment rate and decreases in the unemployment and inactivity rates for young people.

Inflation rates

According to the Consumer Price Index (CPI), inflation reached 4.2% this October and is expected to increase above 5% next Spring. The Bank of England’s goal is to keep it steady at 2%. The goods-products that have been affected the most:

  • energy
  • petrol & gas
  • building materials, houses
  • computer chips, cars, washing machines, smartphones

Petrol’s prices have climbed from ~$40 a barrel in 2020 to ~$70 in Sept 2021 (Brent crude oil price). The demand for oil and gas is pushing up energy prices worldwide. Also, it’s fair to mention that increases in price for petrol and energy are following the worldwide trends and result from BREXIT.

On another side, the overall shortage of semiconductors is making it hard if not impossible to meet the industry demand. All of that translates into price increase for products such as cars, washing machines, smartphones etc…The same thing is happening with building materials, delaying the construction of new houses and consequently increasing their price.

Housing market

The UK’s average house price increased by 11.8% in September 2021, bringing the average value to a record high of £270,000. Also, it’s worth mentioning that since May 2021 we surpassed 2008’s values twice. Among other reasons, this can be explained partly by the Stamp Duty Land Tax holiday, allowing new buyers to enter the market. Its impact was so powerful that the government decided to postpone the end of the holiday twice. We can still wonder who benefitted from all this…

Another reason prices in real estate increased, is the Government’s initiative to help people buy their first property, I’m talking about the Help-to-buy schemes. Simply explained, the government is trying to help first-time buyers to buy a new property with either a loan to help with the cost of a new-build home or through shared ownership. Nonetheless, this helped pump the already salty prices of houses in the entire UK.

Sterling’s value

The power of the UK’s currency has overall improved: we saw an improvement starting from 2018 that increased the power of the Sterling over the US Dollar and then slowly caught up to 2019’s value until today. Similar results can be seen in the exchange GBP/EUR with a nice jump from £1.1123 to £1.1831 from 2018 to 2019. Coming down to £1.1192 by the end of 2020 and back to £1.1746 today. We still have half of December to go, and anything could happen until the end of the year. Having said that, this quick overview gives a good idea of how the UK’s currency is doing. Other countries are deliberately left outside.




Understanding the dynamics of Finance and the Economy is not an easy task. The variables involved are numerous, but you’re not prevented from doing some research to get a good picture of what’s happening. Having said that, what we saw is that the UK’s economy looks stable, despite the status of employment being unclear, we saw some positive results leading us to believe that we are not facing a crisis yet. We might see some adjustments in the next future over the stock market, inflation is pumping the prices so high that it is difficult to understand the real companies’ value.

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