Niesr Warns Bank of England's Timid Rate Rise Risks Higher Rates for Longer

The National Institute of Economic and Social Research has warned that the Bank of England's cautious interest rate increase last week is likely to make inflation a more persistent feature of the UK economy, risking higher borrowing costs for longer. The thinktank criticised the scale of the hike as too timid, arguing that a bolder move would have been more effective in bringing inflation under control and reducing the need for prolonged tight monetary policy.

According to Niesr, the central bank's incremental approach leaves inflation embedded in the economy, forcing policymakers to keep rates elevated for an extended period. The warning comes after the Bank of England raised interest rates last week by a smaller margin than some economists had advocated, reflecting concerns about the growth outlook. Niesr's assessment suggests that the trade-off between supporting near-term activity and anchoring inflation expectations may ultimately prove costly, with households and businesses facing a longer stretch of high rates.

The thinktank's intervention highlights a growing debate over the appropriate pace of monetary tightening. While the Bank of England has signalled a gradual approach, Niesr contends that a more decisive increase would have delivered a clearer signal to markets and reduced the risk of inflation becoming entrenched. The warning carries weight for investors in UK gilts and rate-sensitive sectors, as a slower path to disinflation implies that the terminal rate could remain higher and the easing cycle delayed. For borrowers, the prospect of rates staying higher for longer reinforces pressure on mortgage costs and corporate financing conditions.

Niesr's caution underscores the challenge facing the Bank of England as it balances the fight against inflation with the risk of unnecessarily dampening economic activity. The thinktank's view that timidity now may prolong the tightening cycle adds to the case for a more front-loaded approach, though the central bank has so far resisted such calls.