In only the second rate rise in a decade, The Bank of England has raised its base interest rate by one quarter of a percentage point, from 0.5% to 0.75% – the highest level since March 2009.

 

The Bank’s Monetary Policy Committee (MPC)had been expected to raise interest rates in May, but held off as the economy weakened at the start of the year – partly due to the particularly harsh weather conditions.

Governor Mark Carney is now confident that economic growth will recover from the 0.2% rate seen in the first quarter, to 0.4% in the second quarter and maintain that pace later in the year.

Whilst the move will be welcomed by savers if they see a lift in their interest rates over the coming months – although only half of savings accounts reflected the last rate in November – it will increase the interest costs of more than 3.5 million residential mortgages that have variable or tracker rates.

The increase will add around £224 p.a. to the cost of an average £150,000 standard variable rate mortagage.

 

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The Bank maintains that there will be further interest rate rises, but Mr Carney said these will be limited and gradual: ‘Rates can be expected to rise gradually. Policy needs to walk, not run, to stand still,’ he said.

However, the Institute of Directors believes that said the Bank had acted too hastily, saying: ‘The rise threatens to dampen consumer and business confidence at an already fragile time.

‘Growth has remained subdued, and the recent partial rebound is the least that could be expected after the lack of progress in the year’s first quarter.’

Savers starved of income – no easy access savings account at a major High Street bank pays interest of more than 0.5% – will be watching closely, but there is no guarantee their rates will improve.

‘no easy access savings account at a major High Street bank pays interest of more than 0.5%’

The Bank said a pick-up in the economy is being supported by household spending, which the Bank said had been ‘erratic’ earlier in the year, and said that it does not believe the recent series of store closures on the High Street reflect a lack of appetite for shopping, rather a shift to online.

However,  Suren Thiru, Head of Economics at the British Chambers of Commerce, said: ‘The decision to raise interest rates, while expected, looks ill-judged against a backdrop of a sluggish economy.

‘While a quarter-point rise may have a limited long-term financial impact on most businesses, it risks undermining confidence at a time of significant political and economic uncertainty.’

On Brexit, Mr Carney said the MPC ‘recognises 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’.

He said: ‘Negotiations are now entering a critical period, with the UK and EU both seeking an agreement by the end of the year.

‘Although the range of potential outcomes is wide, what matters for monetary policy is how people react to developments.’

He said British households so far have been ‘resilient – but not indifferent – to Brexit news’.

 

Outlook

 

The Bank sees ‘modest’ economic growth of 1.4% this year, increasing to 1.8% next year; unemployment is expected to fall further from 4.2% and wage growth is expected to pick up; inflation is forecast to fall back to the Bank of England’s target of 2% by 2020.

However, it said the outlook for the global economy was a bit gloomier, partly owing to the trade war between the US and China, and highlighted a slowdown in the UK housing market this year, which has been ‘concentrated in London’, where mortgage completions are down 12% on 2016.

The Bank is sticking to its guidance that interest rates will continue to head higher, but only at gradual pace and to a limited extent.

The financial markets have taken heed of the Bank’s guidance that interest rates will continue to nudge up, and are forecasting another, and perhaps two, rises of 0.25% before 2020.

In its inflation report, the Bank published what it thinks is the natural interest rate for the UK economy – between 2% and 3% – allaying fears in certain quarters that rates could top 5%.

This low rate is put down to an ageing population because older people tend to save more; this is expected to provide a greater pool of savings for lending to households and industry and prevent the economy from overheating.

 





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