Bank of England votes to raise interest rates - what does it mean for you?
PUBLISHED: 12:05 02 August 2018 | UPDATED: 12:12 02 August 2018
The Bank of England has today unanimously voted to increase interest rates from 0.5% to 0.75%.
The increase puts rates at their highest for almost a decade.
Members of the nine-strong Monetary Policy Committee (MPC) voted to increase rates from 0.5% to 0.75% in only the second rise since the financial crisis struck, following last November’s quarter point hike.
The move brings interest rates to their highest level since March 2009, when they were slashed from 1% to the emergency low of 0.5% in an effort to contain the fall-out from the financial crisis.
Economists had been predicting the rise given that the economy had performed in line with the Bank’s last forecasts in May, when it backed off from a widely anticipated hike to wait and see how the economy recovered after a weather-hit start to the year.
However, lower-than-expected inflation figures - unchanged at 2.4% in June – and weak wage growth had placed a question mark over the increase for some.
It became an even closer call after survey figures on Wednesday signalled a weaker performance from the manufacturing sector in July.
The decision to raise rates will be a blow to some borrowers on variable rate mortgages, but would offer relief to savers who have seen paltry returns on deposits since rates have languished at 0.5% or below since 2009.
The Bank’s last move to raise rates in November from 0.25% to 0.5% was the first such move for more than 10 years, but merely reversed the cut made in the aftermath of the Brexit vote.
Investec economist George Brown believes today’s rise will be the only increase in 2018.
But he predicts a quarter-point rise every six months until rates reach 1.5% in 2020.
“We think the bank wants to raise rates in a gradual way and that would be consistent with the next one in February,” he said.
• WHAT IT MEANS FOR YOU
Why is the Bank raising rates? The Bank has been signalling for some time that rates will need to rise to cool inflation, which surged after the Brexit vote sent the pound plunging and still remains above target, at 2.4%.
It also wants to see rates come off the emergency lows that have been in place ever since March 2009 and return to more “normal” levels.
What will an increase mean for households?
It will come as a blow to millions of mortgage borrowers on variable rate deals, with a quarter point rise adding around £16 a month and £190 a year to the average mortgage.
However, it will offer some relief to savers who have seen their nest eggs decimated by above-target inflation and negligible returns.
Many home owners are also locked into fixed-rate mortgages, and so will not feel an immediate impact from a base rate rise.
And at 0.75%, rates would still be very low by historical standards, given that the base rate stood at more than 5% when the credit crisis and subsequent global financial crisis hit.
Where will rates go from here?
Most economists believe a rate rise this month would be the only one in 2018, with the next one not due until at least February 2019.
Investec predicts a quarter-point rise every six months until rates reach 1.5% in 2020.
But Mr Carney and the MPC have been careful to stress repeatedly that any rises will be “gradual” and “limited” and not see rates increase to the high levels seen in the past.
Does this mean the economy is firing on all cylinders again?
Growth is predicted to have recovered to 0.4% in the second quarter after slowing to 0.2% in the previous three months following a weather-related hit.
But output is still fairly meek and survey figures on Wednesday signalled a weaker performance from the manufacturing sector in July, suggesting that growth is being held back amid global trade disruptions and uncertainty over Brexit.
The jobs market has continued to prove resilient, although wage growth has been weak in the latest readings, pointing to a mixed picture for the economy and consumer spending.
What about Brexit?
The Brexit negotiations and uncertainty over the deal – and indeed, any deal – being in place by the UK’s withdrawal from the EU next March casts a cloud over the outlook for the economy and rates.
The National Institute of Economic and Social Research (Niesr) warned on Wednesday that the Bank should raise interest rates on Thursday, but “stand ready” to reverse the hike if circumstances change.
The influential think tank said: “The committee should emphasise the uncertainty (rather than the certainty) of its future policy stance in its communications and its willingness to reverse its decisions.”