Bank of England makes historic step – raises base rate to 0.5%

2 November 2017

Monetary policy action that has been much speculated on has finally come to pass, with the Bank of England announcing a base rate rise from 0.25% to 0.5%.

The Bank of England’s Monetary Policy Committee (MPC) resoundingly voted in favour of a rate rise, seven to two in favour. This contrasts with the last meeting in which the committee voted 7-2 against a rise.

The MPC states its reasons for returning the rate to the level it was at in August last year: “Inflation rose to 3.0% in September.  The MPC still expects inflation to peak above 3.0% in October, as the past depreciation of sterling and recent increases in energy prices continue to pass through to consumer prices. 

 “The effects of rising import prices on inflation diminish over the next few years, and domestic inflationary pressures gradually pick up as spare capacity is absorbed and wage growth recovers.  On balance, inflation is expected to fall back over the next year and, conditioned on the gently rising path of Bank Rate implied by current market yields, to approach the 2% target by the end of the forecast period.”

Meanwhile, Bank of England governor Mark Carney says: “With unemployment at a 42-year low, inflation above target and growth just above its new, lower speed limit, the time has come to ease our foot off the accelerator”

This is a historic moment for the fact that the base rate has not been moved upwards for ten years, since July 2007. But the reality is that a change of 0.25% is limited in scope, and is merely returning the rate to the same level it was in August last year, before the Bank decided to cut the rate to combat a post-Brexit downturn that failed to materialise.

Neil Williams, group chief economist at Hermes Investment Management says: “Today’s quarter-point rate hike shouldn’t raise eyebrows, and looks for now to be a one-off ‘muscle flex’ by the Bank of England, rather than the start of an aggressive tightening. What it does is reverse the post-referendum cut from 15 months ago, which, with activity broadly holding up, may have been an unnecessary safety-net.”

 “In the MPC’s eyes, it also gives them more rate ‘powder’ to use, should the economy later start to slow again.”

Limited effect

The implications of the first rate rise in a decade are wide-ranging, despite the modest move. For the most part commentators are quick to offer reassurance to consumers.

In anticipation of a base rate rise, in recent weeks savers had already started to benefit from new ‘table-topping’ rates, but even so, they will still have to work hard to ensure  that their savings beat inflation of 3%. Moneywise’s model savings portfolio can help

Nick Leeming, chairman at estate agent Jackson-Stops thinks that the housing market will remain undisturbed despite predicting the end of a “golden period” for mortgage rates: “Today’s moderate interest rate rise is unlikely to disturb the housing market. Good things don’t usually last forever and the end of this golden period of great mortgage deals won’t be a surprise to most prospective and current homeowners. The market remained fairly stable throughout the General Election and the EU referendum so it would be surprising to see activity levels or house prices fall as a result of such a modest change to interest rates.”

Should you rush to remortgage? Brian Brown, head of insight for Banking & General Insurance at financial data company Defaqto says: “The bank rate rise has been widely anticipated, by both mortgage providers and their customers.

“Even without the base rate change, many providers had already begun to increase their rates, with most fixed rate providers increasing rates on at least some of their deals over the last month.

“Customers though don’t need to panic, as this was a relatively small increase. Any further rate rises are likely to be gradual and there is plenty of time to consider other options.  We would encourage consumers to calculate the costs of switching their mortgage, even if they are not quite at the end of any penalty period.  Those coming to the end of fixed rate deals and those on Standard Variable Rates should see a mortgage broker to discuss their options for their next mortgage deal.”

Steve Webb, director of policy at insurer Royal London predicts a modest boost for pensions: “After a decade of low and falling interest rates, today’s rise provides a modest boost for pensions.  If today marks a turning point in interest rates this should signal a gradual recovery in annuity rates and could help to reduce deficits in company pension schemes.  

 “But it is important not to get carried away.  Assuming the Bank of England sticks to its plan for ‘gradual and limited’ increases, this announcement is unlikely to radically transform the pensions landscape as rates remain at historically low levels.”

Richard Stone, chief executive at The Share Centre, thinks the effect on personal investors will be minor: “For investors, the impact of today’s rate rise on markets is likely to be limited. The market was expecting an increase and a failure to act would probably have had a more dramatic impact. Sterling has strengthened rising from $1.28 at the end of August to above $1.32 at the time of writing. Sterling may be expected to rise further on the news of an actual rate rise, but much of this has already been priced in and the impact will depend on any signalling around the pace of future rises.”

Economic outlook

Many commentators have pointed to a potentially weak outlook for the economy, especially ahead of the UK’s exit from the European Union and the uncertainty this is creating for the economy. There is scepticism of the true reasons for the rate rise.

Jason Hollands, managing director of Tilney comments on the economic outlook: “While the UK’s rate rise will spark debate about whether the economy can absorb slightly higher borrowing costs at a time of elevated uncertainty, it is important not to lose sight of the fact that interest rates remain incredibly low and the supply of credit is abundant.

“This rate rise is more a case of easing off the accelerator than tapping on the brakes. Today’s move simply reverses the Bank’s decision to slash rates in the immediate aftermath of the Brexit referendum, a move that in hindsight may have been overhasty and predicated on a more gloomy prognosis about the immediate impact of the decision to leave the EU than what subsequently transpired.”

Ben Edwards, portfolio manager of the BlackRock Corporate Bond and the BlackRock Sterling Strategic Bond funds has a more pointed opinion of the current situation.

“Assuming the Bank of England’s intention to hike for the first time in a decade was at least partially to introduce some risk of higher borrowing costs into the minds of market participants and UK consumers, the initial reaction will come as a significant disappointment to Mr Carney,” he says.

“The pound fell, UK government bonds rallied and pricing for the next hike has been pushed out. Might this be a classic ‘buy the rumour, sell the fact’, or a vote of no confidence in the precarious state of the economy and the Bank’s ability of the bank to embark on any kind of real tightening cycle?

“He will, no doubt, look to dampen the view that this is “one and done” but the reality has not changed: Brexit negotiations will determine much of the fate of the economy and the pound, and he has little scope to control either over the next twelve months.”

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