Bank of England lifts interest rates for first time in 10 years

A general view of the Bank of England in London.
Picture: Stefan Rousseau/PA Wire

A general view of the Bank of England in London. Picture: Stefan Rousseau/PA Wire - Credit: PA

The Bank of England today raised interest rates to 0.5% from 0.25%, marking the first increase in more than a decade.

Policymakers on the bank’s nine-strong Monetary Policy Committee (MPC) voted 7-2 in favour of the quarter point rise, which marks the first rates increase since July 2007.

And the bank signalled that more increases are on the way as it looks to cool surging inflation, which it predicts will now peak at around 3.2% this autumn.

The Bank of England’s quarterly inflation report also suggested that two more rate rises are likely over the next three years in order to return inflation back to its 2% target, which could see rates hit 1% by the end of 2020.

The milestone rate rise comes as the Bank of England cut its forecast for growth to 1.6% for 2017 from the 1.7% previously predicted, but held forecasts at 1.6% for 2018 and 1.7% for 2019.

Millions of borrowers on variable rate deals will be impacted by the rates decision, which will add around £15 a month to the cost of the average mortgage, while it will offer some relief to savers hit by surging inflation and negligible returns.

But a quarter point rise will only reverse the emergency cut seen in the aftermath of the Brexit vote shock in 2016 as the bank sought to head off turmoil in the economy.

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And the bank said the impact on mortgage borrowers would be modest and gradual, with around 60% on fixed rate deals.

John Dugmore, chief executive at Suffolk Chamber of Commerce, said: “This announcement from the Monetary Policy Committee, in amongst all other current uncertainties, will be viewed by many businesses in Suffolk who are already concerned about the challenging times ahead as the first step in a longer policy movement.

“Our preferred outcome for businesses in Suffolk was for a further period of monetary stability, with interest rates steady over the near term.

“With the Bank of England’s latest forecasts of sluggish growth for the next few years, Suffolk Chamber is urging government to 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.”

Denise Rossiter, chief executive at Essex Chambers of Commerce, said: “These are challenging times for monetary policymakers. The MPC had the unenviable task of weighing future risks to inflation, from a tight – and tightening - labour market, pass-through from a weaker pound and rising commodity prices. A

“Against this, they needed to consider the future risks to under-shooting the inflation target from weak growth, fragile business confidence, and the effects of uncertainty.

“These are finely-balanced judgements: while interest rates will need to return to historic averages at some point, it should be done slowly and with reference to the ever-changing economic context.”

Rain Newton-Smith, chief economist at the CBI, said: “The decision to raise interest rates comes as no surprise, given the recent signals from the bank and several Monetary Policy Committee members signalling their intention to vote for a change of course.

“While it’s the first rate rise in over a decade, it is only taking the rate back to the level seen in August 2016 and at 0.5% it remains near rock bottom.

“Businesses will be watching the reaction of consumers closely and what’s important is the pace of any future rises. As rates creep up, it’ll be important to keep an eye on the impact for those at the lower end of the income scale.”

TUC general secretary Frances O’Grady said: “This is the last thing hard-pressed families need. With living standards falling, the economy needs boosting not reining in. Today’s hike is a hammer blow for those in problem debt, whose repayments will now rise.

“The Bank of England has made the wrong call – but the Government must not hide behind it. Working people are paying the price for ministers’ failure to get wages rising. And for their failure to invest in jobs and services when interest rates were so low.”

Richard Norrington, chief executive of the Ipswich Building Society, said: “Today’s rate change is likely to be good news overall for savers, while mortgage-holders may react with some concern.

“However, it is worth remembering that, despite this rise, the base rate is still at a relatively low level where it had been for 89 of the past 104 months.

“The committee will be hoping that this rise will slow down inflation although I hope not at the expense of economic growth.

“At Ipswich Building Society our business model is carefully balanced between our savings and lending businesses and we will be carefully considering our next steps and how we will continue to support members through this change, including the many mortgage misfits whose needs are not met by the large high street banks.

“I expect that any changes we make to our variable rate products will take effect from 1 January 2018.”