ALL of a sudden, decisions on benchmark UK interest rates have become controversial again.

Over the long years following the eruption of the global financial crisis late in the first decade of the new millennium, the vast bulk of the interest-rate calls by the Bank of England’s Monetary Policy Committee came and went with little in the way of external debate.

Consensus on the MPC around UK base rates became the norm. And it prevailed, by and large, amid the coronavirus pandemic, up until very recently.

However, with inflation rearing its ugly head and previous confident talk among some experts about a temporary, short-lasting spike having dissipated amid a developing energy-price crisis, interest-rate controversy is firmly back on the agenda.

That is not to say that, through the period of predictable decisions and general consensus, everyone has thought record-low interest rates have been ideal. Far from it.

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The normal interest-rate levels that prevailed before the financial crisis are a distant memory, and there have been many unpalatable consequences of their disappearance.

House prices have surged on the back of the rock-bottom interest rates needed to support the economy, putting beyond the reach of many young people the possibility of owning their own home and fuelling the inter-generational divide. Of course, many people of all ages on low to middle incomes will have seen their home-ownership aspirations crushed by the rocketing of property prices.

This is obviously not good from a societal perspective and would appear to be storing up plenty of economic trouble for the future, in terms of imbalances that may well need to unwind at some point.

Likewise, people at a stage of their lives where they have paid off borrowings and could traditionally have relied on a decent interest rate on savings to help fund their retirement have for around 13 years now found themselves unable to earn any kind of normal return on cash. This is far from ideal but not necessarily disastrous when inflation is low. However, annual UK consumer prices index inflation, which was 3.1 per cent in September according to latest official data, is now projected by the Bank of England to peak at around 5% in April 2022.

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UK base rates were cut from 5% to 4.5% in October 2008, after the global financial crisis took a lurch for the worse. They were then reduced to 3% in November 2008, 2% the following month and 1.5% in January 2009. They then dropped to 1% in February 2009 and to 0.5% in March 2009. Base rates remained at 0.5% all the way through to August 2016, when they were cut to 0.25% in the wake of the Brexit vote.

They rose to 0.5% in November 2017 and to 0.75% in August 2018 but then, as the coronavirus crisis developed, the MPC implemented a half-point cut on March 11 last year to take them to 0.25%. Rates were reduced to their current all-time low of 0.1% on March 19, 2020, and have stayed there since.

Talk around a rise in UK base rates as early as last week’s MPC meeting looked a bit overdone. An increase in benchmark borrowing costs last week had not been out of the question, but there had seemed to be only an outside chance of such a move given that, at the MPC’s previous meeting in late September, the nine-strong committee had voted unanimously to keep base rates on hold.

In the end last week, the MPC voted seven to two to keep base rates on hold. The majority included Bank of England governor Andrew Bailey. The two MPC members who voted for a rise in base rates to 0.25% were Sir Dave Ramsden, Bank of England deputy governor for markets and banking, and Michael Saunders, who is regarded as a hawk.

It is worth noting, for all the drama around last week’s decision on rates, that a rise to 0.25% would have taken rates back to only one-third of their historically very low level of 0.75% before the onset of the pandemic.

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Minutes of the MPC meeting appeared to make clear the committee’s view that rates were likely to be heading higher before long. The Bank of England, reporting the outcome of last week’s meeting, highlighted the latest projections in the November monetary policy report. This report signals a far more challenging backdrop than that painted by the Bank’s previous projections in August. The inflation picture has changed quite dramatically over this period, and certainly not for the better. The forecast 5% peak in inflation is “materially higher than expected in the August report”, the Old Lady of Threadneedle Street observed last week.

The Bank of England, which has a 2% target for annual CPI inflation, said: “The committee’s updated central projections for activity and inflation are set out in the ...November monetary policy report. The projections are conditioned on asset and energy prices averaged over the 15 days to October 27. This gives a market-implied path for Bank Rate that rises to around 1% by the end of 2022.”

It added: “Conditioned on the market-implied path for Bank Rate and the MPC’s current forecasting convention for future energy prices, CPI inflation is projected to be a little above the 2% target in two years’ time and just below the target at the end of the forecast period.”

The Bank did flag an alternative, more benign scenario.

It said: “In an alternative scenario that is conditioned on energy prices following forward curves throughout the forecast period and as set out in the November report, CPI inflation falls back towards the target more rapidly than in the MPC’s central projection, and is materially lower over the second half of the forecast period.”

Time will tell how things play out from here and, amid the challenges, the debate over what should happen with interest rates seems likely only to become even more intense.

Minutes of the MPC meeting noted “market-implied expectations for the path of Bank Rate over the year ahead had increased sharply since the MPC’s September meeting”.

They added: “The committee judged that, provided the incoming data, particularly on the labour market, were broadly in line with the central projections in the November monetary policy report, it would be necessary over coming months to increase Bank Rate in order to return CPI inflation sustainably to the 2% target.”

So far, the Bank has seemed relatively upbeat about the likely impact on the labour market of the end of the UK Government’s coronavirus job retention scheme on September 30. It said last week: “Just over a million jobs are likely to have been furloughed immediately before the coronavirus job retention scheme closed at end-September, significantly more than expected in the August report. Nonetheless, there have continued to be few signs of increases in redundancies and the stock of vacancies has increased further, as have indicators of recruitment difficulties. Taken together, while there is considerable uncertainty, initial indicators suggest that unemployment will rise slightly in 2021 Q4.”

There is understandably debate right now over the timing of interest-rate rises. Dangers lie in waiting too long and having to raise rates higher than might otherwise have been needed to quell inflation, and in acting too quickly and choking off recovery. But it is plain tough times lie ahead for savers and borrowers.

Interest rates on savings are at rock-bottom. And it remains to be seen whether banks will be keen to move them up quickly in response to any rises in benchmark borrowing costs. What does seem clear is that savings rates will remain far, far adrift of providing what would have been regarded as a healthy return on cash before the financial crisis.

And, even though the 1% level for base rates by the end of 2022 implied by financial-market pricing would still be extremely low by historical standards, we should not underestimate the challenges which a rise to that level would present for households and businesses with substantial debt. We are in a very different environment to that prevailing before the financial crisis.