Anticipation is growing ahead of a potential increase in the Bank of England base rate, but what are likely to be the consequences of the first rise since 2007?
The base rate has been at 0.25% since August 2016 and has not risen at all since July 2007. However, the central bank has been put under rising pressure to increase the rate in order to curb inflation.
Inflation has exceeded the Bank of England’s 2% target every month since February 2017, with the next inflation data being released today (Tuesday 17 October).
However, analysis conducted by investment provider Minerva Lending has looked at what happened following previous increases in the base rate. It examined the 20 occasions where rates had risen since the Bank of England became independent of the government in 1997.
It found that inflation typically dropped by just 0.1% in the six months after a rate rise, calculated using Office for National Statistics (ONS) data. This was a much smaller change than other economic indicators.
House prices grew by an average of 4.8% in the six months after the base rate rose while retail sales went up by 1.7%, according to the ONS. Tourism spending by overseas visitors also rose - by an average of 4.3% - and the unemployment rate dropped by 0.2%.
The next base rate decision will announced on Thursday 2 November 2017.
‘How it impacts confidence may be the most important factor’
Ross Andrews, director of Minerva Lending, says: “There has been a lot of talk about the need for the Bank of England to raise interest rates to stop inflation spiralling out of control.
“However, the data from the last 20 years suggests interest rate rises on their own have had none of the immediate after-effects that you might expect.
“In the past, when people may have anticipated tourist numbers might dwindle, the statistics show they have in fact risen strongly on average.
“Circumstances will vary every time but the data shows house prices, inflation and exports have all exhibited unexpected behaviour following previous rises.
“The first hike in interest rates in a decade will also likely have a psychological impact. How it impacts confidence may be the most important factor in how the wide economy performs six months on.”