# Still don't get it: why higher rates make second-round effects more likely

_The Bank held at 3.75%, as I expected. What I did not expect was three votes for a rise, justified by second-round effects the committee itself has conceded are not there._

Neil Woodford · 30 July 2026 · 3 min read

![Bank of England](https://cdn.sanity.io/images/v3acfbvo/production/10d4e9fb999744734fb96b5d6b592621137b70ad-1694x2708.jpg?w=1600&fit=max&auto=format)

---

Today the Bank of England announced its interest rate decision. As expected, the committee voted to hold rates at 3.75%, but this time there were three dissenters, all of whom voted for an increase. This is pretty much what I had expected, but I am a little surprised by the reaction to this decision in financial markets. 

The UK equity market is having a pretty good day, and especially so in domestic sectors, and in the gilt market yields have fallen across the maturity curve, leaving ten-year yields now only 32bps above equivalent Treasuries. I suppose this reflects what I continue to believe is a misplaced “market expectation” that the MPC will increase rates at some stage this year.  _(Neil in the margin: The Monetary Policy Committee, the Bank of England’s nine-member panel that sets Bank Rate. It mixes internal Bank officials with external appointees.)_

The fact that the MPC voted to hold at this meeting suggests that the probability of this outcome has reduced somewhat, hence the fall in yields. Of course, in the background, the fact that the Fed also decided to keep rates on hold this week provided some support.

_[Embedded media](https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2026/july-2026)_

Although this is the decision I expected, I still take issue with the committee’s rationale. The Bank of England’s latest projection sees growth this year slowing in the second half, remaining weak in 2027 at 1.1%, and then recovering a little to 1.7% in 2028. Their inflation projections, although higher than in February before the war kicked off, show inflation averaging 3.2% this year, below last year’s 3.4% (so much for the energy price shock), averaging 2.1% next year (pretty much at target), and then averaging 1.9% in 2028.

In other words, against a backdrop of higher market interest rates and higher mortgage rates, higher taxes and weak growth, and with inflation returning to target next year, why on earth is the committee not contemplating cutting rates? 

Whilst I welcome the Governor’s sensible comment at the press conference that “the committee is not getting closer to a hike”, I am utterly perplexed as to why three members of the committee voted for an increase in rates. I have read the somewhat tortured logic of their predictable position, but it makes absolutely no sense to me. Against the mounting evidence that there are no second-round effects, which the committee as a whole has had to acknowledge, and which is evident in the inflation data and in the labour market, the three hawks on the committee cited future “material” second-round effects and decided that a “risk management strategy” was appropriate. In other words, put rates up now to head off imaginary second-round effects in the future. _(Neil in the margin: The mechanism by which a one-off price shock, here energy, feeds into wages and then into other prices, turning a temporary spike into persistent inflation. It is the hawks’ whole case for moving pre-emptively, and Neil’s argument is that the evidence for it has not turned up.)_

Apart from this being, in my opinion, a completely indefensible and illogical position, I also wonder why these three believe that putting rates up heads off imaginary second-round effects. In my world, if the cost of money goes up, along with higher taxes and higher mortgage rates (because of higher swap rates), surely this makes it more, not less, likely that businesses will put prices up and that workers will ask for higher wages. In other words, higher rates make second-round effects more likely, not less. Of course, it goes without saying that higher base rates won’t have any effect on energy prices either. _(Neil in the margin: The rate at which banks swap floating interest payments for fixed ones. Fixed-rate mortgages are priced off swap rates rather than off Bank Rate directly, which is why what households actually pay can move well before the MPC does anything.)_

This strikes me as the monetary policy equivalent of trying to put a fire out by dousing it with petrol. In my rather simpler world, when energy prices go up interest rates should go down, not up. 

Higher energy prices act like higher taxes, stripping disposable cash from businesses and households, and they also lead to tighter monetary conditions through higher market interest rates. The appropriate reaction to this fiscal and monetary tightening, especially when growth is anaemic, is to cut official rates, not increase them. 

Putting them up, as these three members of the rate-setting committee want to, makes it more likely that the currently imaginary second-round effects materialise into reality.