The UK economy is beginning to heat up back to normal and the BoE needs to raise the base-low interest rate to achieve its inflation target of 2.0%. Because at the current record low of 0.5% the problem is that such low interest rates could lead to excessive demand in some parts of the economy, especially the London housing market, which is overheating rapidly and becoming a bubble, and this would mean high inflation. High inflation would result in a drop in living standards and create uncertainty in consumer confidence. We do not want this therefore rates should be raised to ensure stable inflation, however the problem with increasing interest rates is that means the rate of borrowing will be increased and research has shown that 2 in 5 households will be unable to pay their mortgage if interest rates rise. Another problem with raising rates is that the economy has not recovered fully yet and by enforcing a more contractionary monetary policy the BoE could inhibit future economic recovery as families will have to pay higher interest on loans and consequently real disposable income will fall and families will cut spending, causing economic slowdown. So what is the solution?
The BoE is thinking of leaving rates relatively low to ensure high demand and a good recovery and future growth but also using macro prudential tools to stop any subsequent excess demand. My solution would be to introduce higher taxes on foreigners as excess demand from foreigners in London is the root cause of the inflating house prices, which are forming a market bubble. If you sort this issue out you can keep interest rates lower for longer.