Interest rates on hold in May, as expected
The Bank of England have kept interest rates on hold at 0.5% at their latest Monetary Policy Committee (MPC) meeting.
The MPC voted by a majority of 7-2 to keep rates on hold this month, as it sets monetary policy designed to meet the Bank’s price inflation target of 2%.
Along with the interest rate decision was a unanimous vote to maintain the current level of quantitative easing. This consists of £10bn of sterling non-financial investment-grade corporate bond purchases and £435bn of UK government bond purchases, both financed by the issuance of central bank reserves.
Announcing these monetary policy decisions, the MPC also updated its projections for price inflation and economic activity.
Within their May Inflation Report, the MPC made little change to their central forecast for economy activity. This was despite some ‘near-term softness’ in the economic outlook.
The Bank of England expects the size of the British economy to grow by 1.75% a year on average during its forecast period. This is despite a very low preliminary estimate of GDP growth of just 0.1% in the first quarter of the year; an estimate which came from the Office for National Statistics.
This slow start to the economy at the start of the year has been attributed to adverse weather in late February and early March, with some indications that economic growth in the first quarter is likely to be stronger than implied by the preliminary estimate.
The Bank noted that economic growth continues to rotate towards net trade and business investment, and away from consumption. They note that business investment remains constrained by the Brexit-related uncertainties. It is however supported by strong global demand and accommodative financial conditions.
The report also notes that household consumption growth remains subdued, which is likely to fuel concerns about the financial prospects for the retail sector this year.
One of the key aims of the MPC is to target price inflation at 2%.
With inflation as measured by the Consumer Prices Index (CPI) falling to 2.5% in March, the Bank believes the inflation rates of the most import-intensive components of the CPI appear to have now peaked.
They reported that the impact of the past depreciation of sterling on CPI inflation, while remaining significant, is likely to fade a little faster than previously thought. As a result, their inflation target of 2% is expected to be reached in two years, assuming a gently rising path for interest rates over the next three years.
Despite interest rates remaining on hold at this latest MPC meeting, we should still expect that interest rates will be going up in the future.
Within their notes, the MPC refers to an ongoing tightening of monetary policy over the forecast period. This does of course assume the economy develops broadly in line with its projection.
When interest rates do go up, the Bank expects them to rise at a gradual pace and to a limited extent.
Ben Edwards, Portfolio Manager of the BlackRock UK Corporate Bond Fund and Sterling Strategic Bond Fund, said:
The implied probability for a hike in the summer, which began the year at 60% is broadly unchanged after the Bank voted 7-2 to leave rates on hold today. The volatility around the chances for a hike today is likely a classic case of a central bank communicating a little too much.
Ultimately, market participants may have been better watching the weak economic data unfold than listening to comments from members of the MPC. Our long standing thesis that the UK economy would soften under the weight of BREXIT uncertainty has proved correct – improved wage growth may call for a hike but almost everything else does not. Committee members will be hoping that Q1 was a weather related blip; I’m not so sure.
Interest rates staying on hold at 0.5% will be welcome news for mortgage borrowers. With interest rates at near record lows, it’s positive to see mortgage arrears and possessions also remaining very low.
The latest mortgage arrears and possessions update from UK Finance, for the first quarter of the year, show there were 78,000 homeowner mortgages in arrears of 2.5% or more of the outstanding balance during the first quarter. This is 8% fewer than in the same quarter of last year and represents the lowest level since records began in 1994.
There are a total of 24,100 homeowner mortgages with more significant arrears, at 10% or more of the outstanding balance. This is a large number but still 3% fewer than facing significant arrears a year earlier.
1,200 homeowner mortgaged properties were taken into possession in the first quarter of 2018, which is a number unchanged from the same quarter last year.
Jackie Bennett, Director of Mortgages at UK Finance, said:
The number of mortgages in arrears is at its lowest level since records began while possessions remain at a historic low. This has been helped by low interest rates and lenders supporting borrowers through periods of temporary financial difficulty wherever possible.
However, the recent change to Support for Mortgage Interest (SMI) from a benefit to a loan, as well as potential pressure on households from a future base rate rise, risk causing a reversal of this trend as the year goes on.
Only a small minority of those eligible for the SMI loan have taken it up so far. Lenders will proactively help borrowers in receipt of Support for Mortgage Interest (SMI) to see if there are other ways to make up their payments if they do not want to take out the loan.
As ever, customers should not hesitate to contact their lender if they anticipate any payment problems and want to discuss what options are available. Repossession is always a last resort.
Were you surprised that interest rates were kept on hold at 0.5%? What’s your expectation for rising interest rates in the coming months and years?