Bank set to hike rates for first time in decade
Households are expected to be hit with the first rise in interest rates for more than 10 years today as the Bank of England looks to cool surging inflation.
Members of the Bank’s ninestrong Monetary Policy Committee (MPC) are predicted to vote to raise rates from 0.25% to 0.5% in the first such move since July 2007.
Experts estimate that eight million Britons have never seen interest rates rise in their adult lives, with borrowing costs having languished at rock-bottom lows since the financial crisis.
It will come as a blow to millions of mortgage borrowers on variable rate deals, although it will offer some relief to savers who have seen their nest eggs decimated by surging inflation and negligible returns.
The decision comes after Bank Governor Mark Carney has repeatedly warned in recent months that it may be “appropriate” to hike interest rates as Brexit-fuelled inflation looks set to rise further.
But a quarter point rise will only reverse the cut seen in the aftermath of the Brexit vote shock in 2016 as the Bank sought to head off turmoil in the economy.
Experts believe the voting result on the Bank’s rates committee and the commentary in its quarterly inflation forecast report will be key to whether the hike is likely to mark the start of a series of interest rate rises.
Edward Park, investment director at investment manager Brooks Macdonald, expects the Bank to pause after the predicted November hike.
He said: “We believe that any hike in November will reflect a reversal of the post-Brexit stimulus rather than the beginning of a short-term series of hikes.
“With the UK consumer still heavily indebted, via both mortgages and credit, at the same time as there is a real wage squeeze, we don’t think the near-term outlook warrants materially higher rates.”
But the Bank is tasked with returning inflation back to its 2% target since the Brexit-hit pound has sent prices racing higher and economists are pencilling in as many as three hikes to 1% by the end of 2019 to bring it back from the 3% recorded in September.
The economy has performed better than feared since the EU referendum despite the pound’s plunge, with growth edging up to 0.4% in the third quarter from 0.3% in the previous three months, according to last week’s official figures.
This has given the Bank room to consider raising rates, although a number of members on the MPC have voiced fears over uncertainty ahead amid Brexit negotiations.
A rate hike also comes at a painful time for Britons, who are being squeezed by paltry wage growth and sharply rising inflation.
Economist Philip Shaw at Investec said while near-zero interest rates are “not healthy”, there are concerns over the timing of a hike.
He said: “Household budgets are under pressure and higher interest rates may bring about a further reaction by consumers, slowing the
Key questions and answers
Why is the Bank set to raise rates now? The Bank is looking to cool surging inflation, which has been sent higher by sharp falls in the pound since the Brexit vote.
Consumer Prices Index (CPI) inflation hit 3% in September – its highest level for more than five years – and the Bank has warned it could rise further still.
The Bank is tasked by the Government with keeping CPI at 2%, but has been tolerating higher inflation amid uncertainty caused by the Brexit vote to prevent shocks to the economy.
Policymakers are now becoming less tolerant of surging inflation, given that the economy has performed better than feared since the EU referendum. Is the economy strong enough to withstand a rate rise? Growth edged up to a better-than- economy further.
“Activity is also vulnerable to a retracement of corporate activity on the back of Brexit-related uncertainty.”
He added the outlook for rates was “very uncertain”.
Howard Archer, chief economic adviser to the EY Item Club, said the expected 0.4% in the third quarter from 0.3% in the previous three months, according to last week’s first official estimate.
This suggests the economy is stable and no longer in need of the emergency boost delivered by the Bank after last year’s Brexit vote.
But some economists have voiced fears over the timing of a rate hike, amid uncertainty caused by Brexit negotiations and a shaky consumer outlook as household finances are squeezed by rising inflation and paltry wage growth. What will an increase mean for households? It will come as a blow to millions of mortgage borrowers on variable rate deals, although it will offer some relief to savers who have seen their nest eggs decimated by surging inflation and negligible returns.
But a quarter-point rise will only take rates back to where they were Bank may “sit tight for an extended period after an initial hike to see how consumers and businesses respond”.
He does not believe rates will rise again until “at least” later 2018, although some economists said the next hike could come as early as February if economic growth remains stable. before the August 2016 cut, meaning that any impact is expected to be modest.
More of a worry for borrowers is the outlook for further rises, with economists predicting as many as three rate increases over the next two years.
This could hit some home-owners hard, given the popularity of variable rate mortgages in the UK, meaning the impact of a rate hike can be felt very quickly by households, which are already highly indebted. Where will rates go from here? Economists believe rates could hit 1% by the end of 2019 to bring inflation to target, although the timing and degree of further hikes are highly dependent on the economy and Brexit impact.
Some predict rates could rise again as soon as February, but others expect there will be a pause until at least later in 2018.