Interest rates maintained at 0.25% but MPC warns rises are to come
Minutes from the Monetary Policy Committee's (MPC) September meeting relayed policymakers decision to maintain bank rate at 0.25% along with the £10 billion purchase of the stock of sterling non-financial investment-grade corporate bonds and to maintain the stock of UK government bond purchases at £435 billion. The committee voted 7 to 2 to maintain bank rate with committee members Michael Saunders and Ian McCafferty repeating their June and August votes to increase bank rate by 25 basis points.
The Bank of England is tasked with maintaining inflation around a 2.0% target in a manner that supports both economic growth and employment. Inflation, as measured using the Consumer Price Index, reached 2.9% in August 2017, up from 2.6% in July 2017, and is now expected to breach 3.0% in October. Simultaneously, unemployment sits at a 42 year low at 4.3% while economic growth remains on target with GDP rising 0.3% as expected in the MPC's August projections.
While the MPC is to keep inflation around a 2.0% target, it must balance the trade-off between the speed at which it returns inflation to the target level with the support that monetary policy is lending to growth and employment at that point in time, particularly so during exceptional circumstances.
The minutes show that the MPC feel exceptional circumstances are now in play following the June 2016 vote to exit the European Union (EU). This decision immediately led to a depreciation of sterling which has contributed to the increase in prices, particularly for those goods and services most import-intensive (such as clothing and footwear). The price of sterling has been volatile over the last year and continues to be so as a result of this vote.
The MPC indicated that it is not for monetary policy to prevent the necessary adjustment that is taking place following the decision to leave the EU, and that while this adjustment takes place, inflation is anticipated to overshoot its target level for the next 3 years. During this period, policymakers feel that a tightening of monetary policy will be appropriate over the coming months if economic data continues to track forecasts. Many policymakers feel that an increase in bank rate will be necessary, but that increases will be at a gradual pace and to a limited extent.
Commentary
We have seen the Bank of England stepping up warnings for a rate increase recently and today's minutes have explicitly outlined that a rate rise could be due in the coming months. The probability of a rate increase to occur in November 2017 was only 18% one week ago. Following today's announcement, this has jumped to 42% with a 54% probability of a rate rise at December's meeting. Should a rate rise occur, it is likely to simply reverse the emergency rate cut in August 2016, returning bank rate to 0.50%.
Increases to interest rates are positive for savers as they will be set to earn more. We have seen interest rates creep up over 2017 and here at Cascade, we will be watching closely for increases to short-term savings rates as a result of today's announcement.
On the other hand, an increase to interest rates will add to the household squeeze on incomes as payments for credit, mortgages and borrowing linked to variable rates will rise, amidst a period during which wage growth has failed to match inflation.
The MPC next meet in November. We'll be running our savings analysis ahead of then and will keep our exclusive community updated on the impact to savers during the interim period. If we can be of assistance, do give us a call on 0191 4813777 and we'll be happy to discuss how the Cascade service can help add value and reduce risk to your savings portfolio.