A clash with Iran would disrupt oil supplies from the Gulf, pushing up oil prices globally. (Image: Getty)
Interest rates aren’t high by historic standards, they were over 15% back in the 1980s.
But the pace of change has been record breaking. Between December 2021 and August 2023 the Bank of England’s base rate went from 0.1% to 5.25% – a 5150% increase.
That caused lots of pain for anyone with large debts, whether corporate loans or household mortgages.
Understandably, companies and households have made efforts to reduce their debts.
That results in less spending in the real economy, reducing demand and taking the heat out of inflation.
So far so good. The Bank of England has got inflation back down to just above its 2% target, and might be feeling pretty happy with itself.
But this is where the hard work starts.
High are meant to smother economic activity. Keep them high too long and you don’t just cool the economy, you risk suffocating it altogether.
To make matters worse, the UK is not an island – at least not in the economic sense.
External geopolitical events rock the economy and disrupt the best laid plans.
These are the challenges Bank of England Governor Andrew Bailey now faces.
The jobs market is cooling with private sector wage growth slowing. A “painful” budget, that sees taxes rise could lower the temperature of the economy further.
It doesn’t help that the value of the pound is up 8.3% against the dollar this year.
A strong pound means UK goods and services are more expensive for international buyers – creating a chilly headwind for UK companies.
Finally, there’s the geopolitics.
The conflict in the Middle East shows increasing signs of escalation. A clash with Iran in particular would disrupt oil supplies from the Gulf, pushing up oil prices globally.
Higher oil prices risk higher petrol prices and utility bills, sucking more money out of company budgets and consumer pockets.
Together with higher and higher taxes that could push the UK into an economic deep freeze.
It’s no wonder the Bank thinks it might need to be a “bit more aggressive” in cutting . Rates are a blunt tool, but should boost consumer and corporate spending, while also weakening the pound.
All good news for the economy.
The goal is an economy that’s not too hot, or too cold, but just right – but nailing a fairytale ending is no mean feat.