Bank of England reveals interest rates decision

The Bank of England reacted to mounting pressure to stabilise the economy yesterday and implemented the first rise in interest rates for a decade.

The Monetary Policy Committee, the body responsible for setting the rate, agreed to a 0.25% increase – taking the overall rate to 0.5%.

The decision, which had been forecast by many analysts, had been one of the most anticipated for many years. It is the first increase since July 2007.

The MPC, although split in recent months about whether or not to announce an increase, had hinted that an increase might be coming sometime during the next few months.

A growing need for stability in the economy appears to have finally forced their hand.

What the decision will mean for Chancellor Philip Hammond as he prepares for his autumn budget in a few weeks time remains to be seen.

Many business groups had been hoping that the Bank might avoid any increase because of the implications it would have for many firms already struggling against mounting costs.

The increase comes shortly after latest growth figures showed the economy expanded by more than expected in Q3 – up by 0.4% compared with the April to June quarter.

The MPC had said previously that a majority of its members felt an interest in rates could be justified if the economy showed signs of expansion.

Mike Cartwright of West & North Yorkshire Chamber of Commerce said: “The rise was being predicted by many observers and so does not come as a shock.  However, as the first rise in 10 years, it does put a marker in the sand and we need to make note of the action.  With seven of the nine MPC members voting for the increase, that’s also quite a clear message.  Our message back to the committee would be to stress the importance of taking things steady and monitoring reactions and outcomes carefully.

“While the Brexit-related constraints on investment and labour supply referred to by the committee are real, there is still plenty to be positive about within our local business community.  Our last survey results showed that confidence is still strong, with many firms looking for new markets and opportunities, and not simply waiting to see what happens with Brexit negotiations.  With the Bank of England’s latest forecasts of sluggish growth for the next few years, the government must use the upcoming Autumn Budget to boost business confidence and investment, and reduce the pressure on prices from policy decisions such as the forthcoming hike in business rates.”

Eleanor Temple, chair of R3 in Yorkshire and barrister at Kings Chambers in Leeds, added: “Even a small rise to the historically low level of interest rates could cause problems for many borrowers. Vulnerability to a financial shock like an interest rate rise is widespread; many people just don’t have much financial headroom left, following a long period of stagnating wages and growing levels of household debt. On the business side, our research has picked up thousands of businesses who would be unable to adjust to even a small interest rate rise.

“The latest statistics showed an increase in the number of people becoming insolvent in the third quarter of this year, continuing an overall upward trend since mid-2015. With interest rates having hovered near rock bottom for nearly a decade, many borrowers are deeply unprepared for any rise in the cost of personal credit – many will never even have experienced a rate rise. This is especially acute as use of credit can often be the only way people can afford to pay for a place to live, a car to get to work in, or even the basics, like food or energy bills.

“Our concern is that many people now take soft credit terms and low interest rates for granted, to an extent, whether or not they realise it, and should the current conditions change, they will find themselves exposed.”

James Roberts, Chief Economist at Knight Frank, said: “An increase in the base rate is often viewed with trepidation by the property industry, but this long expected move is unlikely to have a negative impact. I expect the Bank of England will follow the same strategy as the US Fed, and gently apply the brakes while giving lots of advance warning, in order to balance the competing pressures of normalising rates while not derailing growth.

“Consequently, I see a gradual rise ahead, partly to stockpile some future rate cuts should the MPC need to combat another downturn at a later date. Also, the Bank of England is showing some younger homeowners that rates do actually rise, given how long it has been since the country saw an increase – the last UK rate hike in 2007 came a few days after the first iPhones went on sale.

“For commercial property, it should be remembered that debt has played far less of a role in the market in recent years than was the case prior to the financial crisis. Commercial property yields are not strongly correlated to interest rates, so I do not see a small rate increase having much of an impact. Indeed, in some markets the re-emergence of rental growth, such as for offices in districts popular with technology firms, should keep investors active.”