INTEREST-RATE fever has gripped the UK for valid reasons. It will worsen before subsiding, posing substantial risks of collateral damage and unintended consequences. And it highlights the urgent need for a policy response that goes well beyond the Bank of England (BoE). 

Three developments that were previously confined to specialised financial media outlets are now being discussed widely in UK society and beyond. 

• First, there is an expectation that the BoE will continue its streak of 13 interest-rate increases, surpassing the current 5% to reach 6% or higher in the coming months. 
• Second, traders and investors are reacting preemptively by driving market interest rates beyond the levels reached during the October-November market disruptions. 
• Third, mortgage costs are rising steadily to levels not seen in decades, amplifying concerns about the availability of affordable mortgage products for those having to refinance or seeking to get on the housing ladder. 

The primary cause of these developments is the persistently high and increasingly sticky inflation rate. While other advanced countries also face inflationary pressures, the situation is notably worse in the UK, where the current inflation rate is more than double that of the US and also higher than that of the eurozone. 

In recent quarters, inflationary pressures have expanded from a limited number of items, such as energy and food, to the entire goods sector. Companies passed on their increased costs to consumers, and now services are also experiencing inflationary effects as labour understandably seeks to protect its purchasing power. 

Like other systemically important central banks, the BoE has been caught off guard by the magnitude and breadth of the price increases. Consequently, despite a series of interest-rate increases culminating in last month’s surprising 50-basis-point (bps) hike, the market believes that the central bank is still behind in its effort to achieve its 2% inflation target, which undermines its credibility. This further contributes to the narrative of prolonged high-interest rates. 

The fragility of the situation should not be underestimated. The combination of high inflation, which disproportionately harms vulnerable segments of the population; elevated borrowing costs; and an increased risk of recession poses significant challenges for UK society. These challenges undermine economic, financial, social and institutional stability. As household and corporate confidence erodes, there is a heightened risk of a self-fulfilling stagflationary trap in which inflation remains too high and growth remains too low. 

While the risk is substantial, it can be mitigated through timely policy changes that extend beyond the purview of the BoE. Overreliance on the central bank to control inflation, solely through demand-side measures, poses a greater risk of economic damage and financial instability. Effective and credible monetary policy needs to be accompanied by broader government initiatives and improved public-private partnerships. 

The government should intensify its continuing efforts to enhance the supply side by boosting lagging productivity, improving the functioning of the labour market, revitalising key public services, establishing smoother international trading relations and addressing significant secular transitions mentioned below. Similarly, companies need to embrace collaborative approaches, remembering the adage that it is challenging to thrive in a deteriorating economic environment (“you can’t be a good house in a bad neighbourhood”). 

This is not just a short-term policy priority; it is a critical long-term imperative occurring alongside exciting technological advancements, an urgent energy transition and changing globalisation. It presents an opportunity that should be seized and effectively communicated to society. 

Failure to do so will intensify the blame game surrounding inflation, involve more harmful finger-pointing and further complicate an already intricate policy challenge critical to socioeconomic well-being and national security. — Bloomberg 

• This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. 

• This article first appeared in The Malaysian Reserve weekly print edition