Bank chiefs on brink of hiking interest rates to combat inf lation
BORROWERS were given a wake-up call yesterday as the Bank of England came close to raising interest rates for the first time in a decade.
Three of the rate- setting panel’s eight members backed an increase to 0.5 per cent – a move that would have spelled misery for millions of families with mortgages.
The decision was seen as a warning that the 0.25 per cent Bank rate could rise to stop inflation rising further from its four-year high of 2.9 per cent.
Rebecca Piggott, of the National Institute of Economic and Social Research, said: ‘This level of disagreement raises the probability of an interest-rate rise in the near future and that would exert further pressure on household budgets.’
Such a move by the Monetary Policy Committee would be welcomed by savers who have been left with paltry returns since rates were slashed during the financial crisis.
The impact of rising prices was underlined yesterday by figures showing retail sales fell 1.2 per cent between April and May as families reined in spending.
Though sales were higher than in May last year, this was the slowest rate of annual growth since April 2013, the office for National Statistics said.
ole Black, of the oNS, said: ‘Increased retail prices across all sectors seem to be a significant factor in slowing growth.’
In a further development, sofa chain DFS warned its profits would be lower than previously thought as shoppers stayed away from its stores. The malaise on the high street comes as workers see their spending power eroded by rising prices at a time of subdued wage growth.
Economist Chris williamson, of IHS Markit, said: ‘ when prices rise faster than wages, it should be no surprise to see household spending come under pressure, and that’s exactly what the UK is seeing right now.
‘The squeeze on household budgets is likely to get worse before it gets better.’
The Bank of England yesterday warned that inflation ‘could rise above 3 per cent by the autumn’ – much higher than the 2 per cent target.
But while higher rates would help control inflation and provide welcome relief to shoppers as well as savers, it is feared they would hammer borrowers struggling with mortgages – and in turn derail the economy.
‘It would be madness to raise interest rates now, said Samuel
‘Last thing the economy needs’
Tombs, of Pantheon Macroeconomics. ‘A rate hike is the last thing the economy needs.’
And Mike Amey, a fund manager at investment giant Pimco, said: ‘A near term hike would be a bold move, but this is a useful wake-up call.’
But Howard Archer, of the Ernst & Young Item Club, said economic and political uncertainty meant that there was still a case for rates remaining low for some time to come.
Rates last rose in July 2007 – to 5.75 per cent – but this was quickly followed by cuts as the financial crisis plunged Britain into recession.
Yesterday’s vote, when Bank Governor Mark Carney was among the five opposing a rise, was the first time three panel members have backed increasing rates since 2011.