UK interest rate hikes ‘won’t tame Trumpflation’: Bank of England warned of damage to economy

The Bank of England has been warned that interest rate increases would do ‘more harm than good’ as war in the Middle East batters the UK economy.

Business chiefs joined forces with union leaders to sound the alarm over the impact of higher borrowing costs on households and firms at a time of weak growth and job losses.

It came after official figures showed inflation was already well above the 2 per cent target at 3 per cent in February – before the conflict sent oil and gas prices soaring and fuelled fears of a painful energy price shock.

The threat of higher inflation – US bank Goldman Sachs has warned it could hit 5 per cent – has seen traders bet on as many as four interest rate hikes in 2026, after previously expecting cuts.

But the Bank of England was urged to resist a hike as experts contrasted conditions today with those when central banks raised rates sharply to contain inflation after Russia invaded Ukraine in 2022.

David Bharier, of the British Chambers of Commerce, said: ‘Raising rates would come at a significant cost to businesses and the wider economy. Investment is already under strain from higher taxes, trade frictions and global uncertainty. 

‘Higher borrowing costs risk further weakening confidence and delaying growth.’

Warning that ‘higher interest rates will not stop Trumpflation’ caused by energy prices, TUC general secretary Paul Nowak said: ‘The Bank should not over-react. It should remain focused on cutting rates as soon as possible.’

The comments were echoed in the City, though economists said a prolonged conflict that disrupts energy supplies may force the Bank’s hand.

Rob Morgan, chief investment analyst at Charles Stanley, said the prospect of four rate rises ‘looks exaggerated given the UK’s fragile backdrop’.

He added: ‘Raising rates aggressively into softening demand would risk doing more harm than good.’ 

Experts said conditions in the UK today are very different from when Russia invaded Ukraine – sending energy prices soaring. Inflation was 6.2 per cent back then, while interest rates were just 0.5 per cent, compared to 3.75 per cent today.

Unemployment was 4 per cent, compared to 5.2 per cent today, and while the economy has not grown since June, it was expanding rapidly in 2021 and 2022 as it bounced back from lockdowns.

Anna Leach, chief economist at the Institute of Directors, said ‘multiple rate hikes seem unlikely and unnecessary’.

Zara Nokes, an analyst at JP Morgan Asset Management, said: ‘We are very unlikely to see an inflation spike in the same magnitude as 2022. The Bank should not need to be hiking rates this year.’