Bank of England paves the way for interest rate rise in May 2018
The Bank of England sets Monetary Policy to maintain inflation for price stability around a 2% target in a way that helps to sustain employment and economic growth. At its March 2018 meeting, the Monetary Policy Committee (MPC) voted by a majority of 7 to 2 to maintain Bank Rate at 0.50% while voting unanimously to maintain the "stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion" while "also voting unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion."
After the vote to leave the European Union (EU) in June 2016, the value of sterling fell which led to an increase in consumer prices. This increase, measured using the Consumer Price Index, reached 3.0% in January 2018 but economists maintained that prices would adjust to the fall in sterling and inflation would gradually move downwards towards its 2.0% target. The February Inflation Report supported this as inflation fell to 2.7%. The biggest contribution to the downward move came from a a smaller rise in the price of transport and food as compared to one year ago, with the fall in the price of accommodation services contributing to the 0.3% fall too.
Interest rates have been at historical lows since 2009 as the Bank of England sought to support the UK's recovery after the global financial crisis. Over the nine years since, the economy has recovered considerably. UK employment is at a forty year high with strong growth. As a result of this, the MPC have indicated that a tightening of monetary policy is required and have already increased interest rates from 0.25% to 0.50% in November 2017.
The March 2018 minutes indicate that the MPC feel that an ongoing tightening is required to ensure the economy does not grow too fast and inflation does not remain above the 2% inflation target. However, any further rises in interest rates are expected to happen at a gradual pace and to a limited extent. The MPC have indicated that interest rates are likely to remain substantially lower than a decade ago. This commitment has led the market to expect no more than two rate rises this year, and as a result we have seen no changes to savings rates in the main over the last three months.
It is expected that there will be an increase in interest rates in May 2018. The March 2018 minutes indicate that the MPC feel that come May 2018, they will hold sufficient evidence and data to "undertake a fuller assessment of the underlying momentum in the economy".
We will keep you updated on key data reports as we progress. Should you wish to discuss how to get the most out of your cash between now and then, do get in touch by giving us a call on 0191 481 3777.