Bank of England raises interest rate to 0.75%

The Bank of England has raised UK interest rates by 0.25 percentage points to 0.75%, marking the first return to nearly pre-crash levels, with March 2009 the last time rates were at this level

The Bank of England’s Monetary Policy Committee (MPC) voted unanimously to increase the bank rate to 0.75% at its latest meeting, a move which was met with an initial rise in sterling, but subsequently it fell 0.8% against the euro.

Since the Bank’s May inflation report, the near-term outlook has evolved broadly in line with the MPC’s expectations. Recent data appear to confirm that the dip in output in the first quarter was temporary, with momentum recovering in the second quarter. The labour market has continued to tighten and unit labour cost growth has firmed, the MPC said. The latest August inflation report and are broadly similar to its projections in May.

In the MPC’s central forecast, based on a gradual increase in interest rates in the near term, GDP is expected to grow by around 1.75% per year on average over the forecast period.

The MPC continues to judge that the UK economy currently has a very limited degree of slack. Unemployment is low and is projected to fall a little further. In the MPC’s central projection, therefore, a small margin of excess demand emerges by late 2019 and builds thereafter, feeding through into higher growth in domestic costs than has been seen over recent years.

CPI inflation was 2.4% in June, pushed above the 2% target by external cost pressures resulting from the effects of sterling’s past depreciation and higher energy prices.

On Brexit, the MPC said that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal.

The MPC minutes said that ‘the main challenges for the Committee had continued to be to assess the economic implications of the United Kingdom withdrawing from the European Union and to identify the appropriate policy response to that changing outlook.

‘During the negotiation period, those economic implications would be influenced significantly by the expectations of households, firms and financial markets about the United Kingdom’s eventual economic relationships with the European Union and other countries, and the transition to them’.

David Lamb, head of dealing at FEXCO Corporate Payments, said: ‘Despite the hawkishness of the decision, the Committee’s minutes are laced with the caution and caveats we’ve come to expect from the Bank, meaning the prospects of a further rate rise look slim. Today's rise is likely to be a case of “one and done”.

‘Though the economy remains fragile, this modest rate rise has been carefully calibrated to rein in the dangerously high levels of consumer borrowing without knocking growth off course.’

The decision to move early on an interest rate rise will be welcome to savers if the banks pass on the slight rise, but there is still much uncertainty in the market in the run-up to Brexit.

Nick Paterno, managing partner of McBrides Chartered Accountants, said: ‘The rate rise suggests some heat needs to be taken out of the economy. The question is, does this increase mark the starting point for rate rises over a period of some years or will Mr Carney eat humble pie with a reversal in the event of a no-deal Brexit and knock-on downturn in the economy? To some extent, it’s surprising that the MPC has not seen fit to keep their powder dry and see how Brexit negotiations go in the run up to March 2019.’

Report by Sara White

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