Bank of England raises Interest Rates for the first time in over a decade
The Bank of England has raised interest rates from 0.25% to 0.50%, the first interest rate increase in over a decade. This returns the official bank rate to its pre-Brexit level, reversing the emergency rate cut enacted in the aftermath of the European Union (EU) referendum in August 2016. Committee members voted 7-2 in favour of the interest rate increase and voted unanimously to leave the stock of sterling non-financial investment-grade corporate bond purchases at £10 billion and the stock of UK government bond purchases at £435 billion.
The Monetary Policy Committee (MPC) is tasked with adjusting monetary policy to meet a 2% inflation target in a way that supports growth and employment. Minutes from the November 2017 meeting indicate that the MPC's inflation and economic outlook remains broadly consistent with its August predictions. These predictions expect for the UK economy to grow modestly over the next few years, for uncertainties during the Brexit negotiation process to affect business investment, for consumption growth to remain sluggish in the near term before rising and for net trade to be bolstered by the past depreciation of sterling.
Monetary policy can prevent neither the real adjustment of the UK economy as it moves towards its exit from the EU nor the impact on real income growth that is expected during the negotiation and transition periods. Today's announcement refers to the "steady erosion of slack" here in the UK however, where slack is used as a measure for the level of unemployed resources in an economy. Unemployment has reached a 42-year low, consumer confidence has remained resilient, domestic financial conditions are highly accommodative and a strong level of growth in the global economy persists. Slack therefore has been decreasing as economic resources are being utilised well. It was for these reasons that the MPC voted to tighten monetary policy to return inflation to its target level in a sustainable manner. Any future increases should be expected at a "gradual pace and to a limited extent" with the MPC noting the considerable risks that remain in the UK's outlook.
Inflation has been rising since the depreciation of sterling following the electorate's decision to leave the EU in June 2016. The Bank of England expects for consumer prices to have rose 3.2% year-on-year in October. If so, governor Mark Carney will be required to write a letter to the chancellor Philip Hammond to explain why inflation has moved more than 1% above its target level. The interest rate increase today has been enacted to support the economy during what the MPC feel is exceptional circumstances, with their forecasts indicating that inflation should fall back to 2.15% by late 2020 following this adjustment.
The impact of higher interest rates on the market will now be monitored particularly after the Financial Conduct Authority's Financial Lives publication showing that up to half of UK adults are financially vulnerable. Despite this, the forecasts indicate that there will be a small impact on the market in aggregate with most households holding fixed rate mortgages, such that monthly payments should not vary enough to cause concern. Some have also argued that the emergency rate cut was too soon and given that it has only been a short time since interest rates were previously at this level, many households theoretically may not feel too big of a negative impact. Those however who have variable rate borrowing or indeed variable rate savings may feel increases as and when each financial provider agrees what adjustment will take place. It is likely that the full 0.25% will be passed on to borrowers where possible but as interest rates for savers have increased over the course of the year, it may take some time for today's announcement to take current deposit rates 0.25% higher.
As it stands, we would not expect for the Bank of England to engage in a rapid rate hike programme. The minutes indicate that any future increases will be predicated on the impact of the UK's planned exit from the EU. During this time, we will keep our exclusive community abreast of material rate changes and notify accordingly.
Should you wish for any information in the interim period, please do let us know and we'll be happy to assist.