Unless the energetic British consumer succumbs to a Damascene conversion to the virtues of thrift, or there is a major financial market shock, UK interest rates are going up again. Probably by at least another quarter point to 6 per cent, probably this autumn. The Bank of England’s latest Inflation Report, reinforced by the stern mood music yesterday from Mervyn King, the Governor, has left economists in little doubt that another tightening of the monetary screw is imminent.

Although inflation has fallen quite sharply in recent months, the slide is not enough to convince the Bank’s Monetary Policy Committee that it can meet its inflation target of 2 per cent without another dose of policy medicine. Consumer spending growth is moderating only very slowly. There’s just not enough spare capacity in the economy and the danger is that companies will be able to make price rises stick.

The five interest rate rises already imposed on businesses and consumers over the past year have probably not, according to Bank thinking, been enough. The patient is not responding as quickly as in the past. When the Bank embarked on policy tightening spells in 1999-00 and in 2003-04, consumers started to curb their spending markedly within nine months. That hasn’t happened this time.

This is partly a transmission problem. Rises in base rate are not feeding through into the rates at which businesses and individuals actually borrow. Between July 2006 and June 2007, base rate rose by 1 percentage point. Yet firms experienced an increase in borrowing costs of only between 0.67 and 0.82 percentage points.

Similarly, consumers saw their actual interest rates go up by an average of 0.51 per cent on mortgages and 0.76 per cent on variable-rate unsecured lending. The transmission mechanism has been delayed because of the fashion for fixed-rate mortgages, and dampened because of the willingness of banks until recently to sacrifice margin in the quest for new loan business. But it is also a matter of psychology. Consumers believe the squeeze on their after-tax incomes is only temporary. So they are still dipping into savings or borrowing more. Home owners, meanwhile, have been reassured by the rising value of their homes. Another nudge on the interest rate lever is likely to be necessary to soften consumer confidence.

With hindsight, the Bank reduced rates too far in 2005, unleashing a pickup in inflationary expectations that continues to persist. The likely rises in the prices of highly visible purchases like basic foodstuffs and petrol this autumn could have a disproportionate impact too. It may be oversimplistic, but the petrol price pushing through £1 a litre for the first time could be just the kind of symbolic jolt to persuade employees into bigger wage demands and firms into raising prices. The Bank cannot afford for the creep-creep of price rises to become any more ingrained in public expectations.

Inflation has overshot the Bank’s forecasts from a year earlier for nine quarters in a row now. Mr King has already had to write his public letter to the Chancellor explaining why he has missed the target.

It is possible that the transmission of past base rate rises is at last about to be passed on with a vengeance, as fixed-rate borrowers negotiate fresh deals on less attractive terms and as banks price risk more realistically by fattening up margins.

But continuing to underestimate the inflationary threat would look worse for the Bank than being accused of overkill. To borrow its own coinage, the risks to its own credibility lie on the upside. For that reason alone, rates are going higher.

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