Base rate held as policymakers rein in growth forecast

11 May 2017
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The Bank of England’s Monetary Policy Committee (MPC) has held the base rate at 0.25% and warned economic growth this year could be weaker than previously expected.

Policymakers voted 7-1 to keep the base rate at its current level – voting the same way as last month.

At the same time the MPC’s growth forecast for 2017 was trimmed from 2% to 1.9%, largely due to a fall in household income and spending. The growth forecast for 2018 was increased from 1.6% to 1.7% albeit with the assumption that the UK’s withdrawal from the European Union will be “smooth”.

 

Analysts say the economy has performed strongly since the vote to leave the EU last summer but that other pressures are now coming into play.

‘Rates may have to rise sooner than the market expects’

Ben Brettell, senior economist at Hargreaves Lansdown, says: “Unsurprisingly interest rates were left unchanged, with just Kristin Forbes voting for a 0.25% rise to 0.5%. However, the Bank also warned that rates may have to rise sooner and faster than the market currently expects.

“Wage growth, which has been notably lacklustre of late, is seen picking up sharply next year. It might not take much positive economic data to persuade further MPC members to join Kristin Forbes and vote to hike rates, though it should be noted that she is due to leave the MPC at the end of June.

“The economy is battling some significant headwinds at present, as higher inflation puts the squeeze on consumers’ real incomes ahead of June’s general election and the start of Brexit negotiations.

“The economy has surprised on the upside since last summer’s referendum, powered by a resilient consumer, but it looks like households are now starting to feel the pinch from the current bout of inflation. The Bank expects inflation to peak a little below 3% in the fourth quarter.”

 

‘Consider locking into a low fixed rate mortgage’

A continued low base rate is likely to be bad news for savers, who continue to battle with poor returns on cash. However, low rates are likely to entice more people into the mortgage market.

Ishaan Malhi, CEO and founder of online mortgage broker Trussle, says: “The Bank of England’s continued reluctance to raise rates certainly won’t be pleasing savers, but anyone looking to buy their first home or switch mortgage can breathe a sigh of relief.

“Locking in a low fixed rate mortgage now can save you an absolute fortune in the long run, especially if you’re one of the three million UK homeowners currently paying over the odds on a lender’s standard variable rate.”

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