In a widely anticipated move, Bank of England (BoE) policymakers raised interest rates for the first time in over a decade. At its November meeting, the Monetary Policy Committee (MPC) voted by seven votes to two in favour of increasing base rate by 0.25 percentage points to 0.5%.
Rates were last increased in July 2007 after which, as the financial crisis intensified its grip, they fell steadily to reach 0.5% in March 2009. Rates remained unchanged until August 2016, when they were cut to 0.25% – the lowest level in over three centuries.
The rate rise had been widely anticipated. The UK economy grew more strongly than expected during the third quarter of 2017; meanwhile, consumer price inflation reached its highest level in over five years during September, rising to 3%. BoE policymakers had made it clear that higher rates would be a natural consequence of intensifying inflationary pressures. Several members of the MPC had already called for tightening, and minutes from the MPC’s November meeting cited the need to return the rate of inflation “sustainably” to its 2% target.
Higher interest rates will be welcomed by savers, but the rise is likely to put unwelcome pressure on borrowers. Although double-digit interest rates were relatively commonplace in the 1970s and 1980s, borrowers have recently become accustomed to very low rates. The BoE estimates that more than 20% of mortgage-holders have never experienced a rise in base rate since they took out their mortgage.
The average outstanding balance on a mortgage is around £125,000. A rate increase of 0.25 percentage points will push up a typical monthly mortgage payment by approximately £15; meanwhile, average earnings have continued to fall in real terms. Elsewhere, the BoE has identified “a pocket of risk” in the growth of consumer credit and, while this is not believed to pose a serious risk to economic growth, it could undermine banks’ ability to withstand a “severe” economic downturn.
The BoE has attributed inflation’s rise to higher import prices caused by sterling’s decline in the wake of the Brexit vote, and warned that the Brexit decision continues to have a “noticeable impact on the economic outlook”. Looking ahead, further increases in interest rates are likely to be both small and gradual while the central bank assesses the impact of this initial tightening.
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