The Bank of England has held the base rate at 0.25%, following a 7-2 decision by the Monetary Policy Committee (MPC).
However, there was a direct hint from the committee that the bank may raise rates soon due to better than expected growth figures, strong employment numbers, and creeping inflation. The MPC’s more hawkish language has caused sterling to jump one cent against the dollar.
The committee has asserted that monetary policy “could need to be tightened” if projected inflation increases come to pass. The bank has predicted inflation to reach over 3% by October this year, which could potentially lead to an interest rate adjustment as early as November.
“A rate rise is overdue”
Nick Dixon, investment director at Aegon, says: “If employment and inflation inform interest rate forecasting, then both would suggest a rate rise is overdue. Unemployment is the lowest in 42 years and inflation exceeds its 2% target. The challenge, however, is understanding whether inflation is structural or a blip linked to the 2016 decline in sterling.
“With increasing demand for pay rises to make up declining real income, the inflation challenge is becoming structural.
“While there has not been a rate rise today, over the next 12-24 months rates will rise higher and faster than market expectations. This will be good news for those seeking annuity income or with cash savings and bad news for mortgage holders.”