UK interest rates rise as hot summer helps economy bounce back

FINANCE: Bank of England says further ‘gradual’ and ‘limited’ hikes will be made

The Bank of England has increased interest rates to their highest level for nearly 10 years after the summer heatwave helped the economy bounce back from a snow-hit start to the year.

Members of the nine-strong Monetary Policy Committee (MPC) voted unanimously to raise the base rate from 0.5% to 0.75%.

The move sees rates rise above the emergency low of 0.5% for the first time since March 2009 and marks only the second hike since the financial crisis, after last November’s quarter-point increase.

Minutes of the Bank’s rate meeting signalled there would also be further rises as policy-makers look to bring inflation back to target, although they continued to stress these would be “gradual” and “limited”.

Millions of borrowers on variable rate mortgages will be hit, with a quarterpoint rise adding around £16 a month or £192 a year to the average mortgage.

But it will offer some relief to savers, who have seen their nest eggs hit by above-target inflation and small returns.

The Bank had backed away from a rate rise earlier this year after growth slowed down sharply to 0.2% in the first quarter, but said the economy had recovered as predicted.

It forecasts that growth rebounded to 0.4% in the second quarter.

The pound made gains versus the euro after the rise, up by nearly 0.3% at 1.128, but was still lower by around 0.1% against the US dollar at 1.311.

In its quarterly inflation report, the Bank kept its forecast for growth this year unchanged at 1.4%, but increased the outlook for 2019 to 1.8% from the 1.7% previously predicted. It continued to pencil in growth of 1.7% for 2020.

The report showed its predictions are based on financial market expectations for rates to rise to 1.1% by mid-2021, suggesting two more quarter-point rises.

But it also said inflation – currently 2.4% – was set to rise slightly higher than it had predicted in May after falls in the pound’s value and higher energy prices.

The rate hike comes as the squeeze on household finances has eased, with wage growth just outstripping inflation.

The Bank said retail sales surged 2.1% in the second quarter, boosted by the recent sunny weather.

“Weather effects – both the snowrelated disruption in February and March and the unseasonably warm weather and long sunshine hours in May and June – seemed to have accounted for around half of the second quarter rise,” the Bank added.

Bank of England governor Mark Carney.