The Bank of England (BoE) has announced a pre-Christmas interest rate hike from 0.1% to 0.25%, after figures released earlier this week showed a bigger than expected leap in inflation to 5.1% in November, which added weight to the argument for a rise.
Officials have been under pressure to curb cost of living increases though calls for an increase have been dampened by the arrival of the Omicron wave of Covid-19 and fears over its likely economic impact.
The central bank said eight members of the Monetary Policy Committee supported the increase, with only one member voting against it as inflation continues to soar beyond its target rate.
Many people with significant amounts of outstanding borrowing will be worrying about the double whammy of inflation and higher interest rates following the announcement.
According to StepChange Debt Charity, higher interest rates will push up the cost of borrowing while being unlikely to feed through to relief in the form of lower inflation quickly enough to help struggling households through the challenging winter months.
The fact that markets have already priced in expectations of a future rate rise means that on common types of borrowing, such as credit cards, the cost of borrowing has already risen in any case, with average credit card rates already at over 21%, according to the BoE.
Among StepChange clients, credit cards are the most commonly held form of debt.
Many households in debt are finding that the gap between their incomings and their outgoings is getting ever wider, reducing their ability to make ends meet.
The cost of food, fuel and energy is far higher than a year ago, yet many of the least well-off households, relying on Universal Credit, have seen their incomes reduced over that period.
StepChange recognises that the new threats posed by the rapid rise of the Covid Omicron variant means that the monetary authorities face a challenge in balancing dampening down inflation with the potential need to protect the wider economy through yet another difficult period.
However, for the hardest pressed households who are caught in the trap of both higher prices and higher borrowing costs, with potentially static or falling income, current conditions raise the risk of falling into debt and exacerbate existing debt problems.
StepChange believes it would be entirely appropriate for the UK Government to accelerate the timing of the previously announced 3.1% uprating of benefits due to take effect next April.
Waiting another four months for an uprating that itself already falls short of the increase in the cost of living will inevitably create problems for those lower income households already experiencing problem debt.
Implementing the uprating early would go some way to alleviating this pressure.
StepChange Director of External Affairs Richard Lane said: “Throughout the pandemic, the Treasury has shown itself able to respond at pace and with agility to protect against the worst effects of Covid on the economy and on individuals. Now is the time to do so again, by bringing forward the timing of the benefit uprating to help households get through this next challenging period.
“For financially vulnerable households who are already struggling to make ends meet, neither higher interest rates nor high inflation are at all welcome, but for many such households the impact of higher inflation is the greater evil.
“An early uprating would be a tangible way of supporting those households at greatest risk of harm due to the rise in the cost of living.”
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