Following months of speculation, the Bank of England has finally put up interest rates.
Its Monetary Policy Committee voted unanimously in August for the 0.25% increase, voting 9-0 to put the Bank Rate up to 0.75%.
In setting interest rates, the Bank is trying to meet a 2% inflation target, but in a way that helps sustain economic growth and levels of employment.
Commenting on the Bank of England’s decision to raise interest rates Helen Morrissey, Personal Finance Specialist at Royal London said:
This rise was widely expected and serves as a timely reminder for people to check how robust their finances are. Many people have already taken action to secure their mortgage payments with over 90% of mortgage lending in Q1 being on a fixed term basis so they will be sheltered from any increase until their mortgage deal ends.
However, there are still millions of homeowners on variable rates who will need to stress test their finances to make sure they can afford their increased mortgage payments long term. Homeowners need to take advice and consider remortgaging as large savings may be available.
Interest rate rises should be good news for savers, but unlike mortgage lenders who increase their rates quickly, the same cannot be said for savings rates which often remain static or increase only slightly. Again savers should take the opportunity to look at what is available in the market and see if they can get a better savings rate than they are currently on.
In addition to the rate rise, the Monetary Policy Committee also voted unanimously to maintain its asset purchase programme of quantitative easing.
The programme, which is financed by the issuance of central bank reserves, is being maintained at £10bn for the stock of sterling non-financial investment-grade corporate bond purchases and £435bn for the stock of UK government bond purchases.
Since the publication of its May Inflation Report, the Bank has reported that the near-term outlook for price inflation has evolved broadly in line with its expectations.
They have said that recent data appears to confirm that the dip in output in the first quarter was temporary, probably due to the extreme spell of cold weather. Momentum has subsequently recovered in the second quarter.
At the same time, the jobs market has continued to tighten and unit labour cost growth has firmed.
These factors all contributed towards the decision to hike interest rates, with the Bank clearly very keen now to move away from an emergency footing for monetary policy.
The MPC’s updated projections for inflation and activity are set out in the August Inflation Report and are broadly similar to its projections in May.
In the MPC’s central forecast, conditioned on the gently rising path of Bank Rate implied by current market yields, GDP is expected to grow by around 1.75% per year on average over the forecast period.
Global demand grows above its estimated potential rate and financial conditions remain accommodative, although both are somewhat less supportive of UK activity over the forecast period.
Net trade and business investment continue to support UK activity, while consumption grows in line with the subdued pace of real incomes.
Although modest by historical standards, the Bank explained that the projected pace of GDP growth over the forecast is slightly faster than the diminished rate of supply growth, which averages around 1.5% per year.
The MPC continues to judge that the UK economy currently has a very limited degree of slack.
Unemployment is low and is projected to fall a little further. In the MPC’s central projection, therefore, a small margin of excess demand emerges by late 2019 and builds thereafter, feeding through into higher growth in domestic costs than has been seen over recent years.
CPI inflation was 2.4% in June, pushed above the 2% target by external cost pressures resulting from the effects of sterling’s past depreciation and higher energy prices.
The contribution of external pressures is projected to ease over the forecast period while the contribution of domestic cost pressures is expected to rise.
Taking these influences together, and conditioned on the gently rising path of Bank Rate implied by current market yields, CPI inflation remains slightly above 2% through most of the forecast period, reaching the target in the third year.
The MPC continues to recognise that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal.
In other words, the outcome of Brexit negotiations could prompt a big change in interest rate policy.
Leaving Brexit to one side, and looking to the future, the Bank has warned that further tightening of monetary policy over the forecast period is likely to be necessary, if the economy continues to develop broadly in line with its Inflation Report projections.
However, it has reassured borrowers that any future interest rate rises are likely to be at a gradual pace and to a limited extent.
Commenting on the interest rate rise, Alpesh Paleja, CBI Principal Economist, said:
This decision was in line with our expectations. The case for another rate rise has been building, with inflationary pressures being stoked by a tight labour market and many indicators now suggesting that weak activity in the first quarter of 2018 was a blip.
The Monetary Policy Committee has signalled further rate rises over the next few years, if the economy evolves as they expect. These are likely to be very slow and limited, particularly over the next year as uncertainty around Brexit takes its toll on business investment.
Do you think the Bank of England was right to hike interest rates? When do you think interest rates will go up again?
