The Bank’s Monetary Policy Committee had been expected to raise interest rates in May, but held fire because the economy went through a weak patch at the start of the year – partly because of the harsh weather conditions, dubbed the Beast from the East.
Led by governor Mark Carney, the Bank is now confident that the dip was temporary and that economic growth will recover from the 0.2% rate seen in the first quarter, to 0.4% in the second quarter and maintain that pace later in the year.
The Bank is sticking to previous guidance that there will be further interest rate rises, but Mr Carney said these will be “limited and gradual”.
“Rates can be expected to rise gradually. Policy needs to walk, not run, to stand still,” he said.
However, the Institute of Directors said the Bank had “jumped the gun” by raising the rate now.
It said: “The rise threatens to dampen consumer and business confidence at an already fragile time.
“Growth has remained subdued, and the recent partial rebound is the least that could be expected after the lack of progress in the year’s first quarter.”
Five interest rate facts
More than 3.5 million residential mortgages are on a variable or tracker rate
The average standard variable rate mortgage is 4.72%
On a £150,000 variable mortgage, a rise to 0.75% is likely to increase the annual cost by £224
A Bank rate rise does not guarantee the equivalent increase in interest paid to savers. Half did not move after the last rate rise
No easy access savings account at a major High Street bank pays interest of more than 0.5%
The Bank said a pick-up in the economy is being supported by household spending, which the Bank said had been “erratic” earlier in the year.
It is also believes the recent series of store closures on the High Street does not reflect a lack of appetite for shopping.
In its Quarterly Inflation Report, the Bank said: “Although in the past year the number of retail closures have increased and retail footfall has fallen, contacts of the Bank’s agents suggest that mainly reflects shifts in consumer demand to online stores and from goods to services.”
But Suren Thiru, head of economics at the British Chambers of Commerce, said: “The decision to raise interest rates, while expected, looks ill-judged against a backdrop of a sluggish economy.
“While a quarter-point rise may have a limited long-term financial impact on most businesses, it risks undermining confidence at a time of significant political and economic uncertainty.”
Commenting on Brexit, Mr Carney said the Monetary Policy Committee “recognises that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal”.
He said: “Negotiations are now entering a critical period, with the UK and EU both seeking an agreement by the end of the year.
“Although the range of potential outcomes is wide, what matters for monetary policy is how people react to developments.”
He said British households so far have been “resilient – but not indifferent – to Brexit news”.
What is the outlook?
The Bank sees continuing “modest” economic growth of 1.4% this year and an increase to 1.8% next year.
The unemployment rate is expected to fall further from 4.2% and wage growth is expected to pick up.
Inflation is forecast to fall back to 2% – the Bank of England’s target – by 2020.
The Bank sees some clouds on the economic horizon.
It said the outlook for the global economy was a bit gloomier, partly owing to the trade war between the US and China which has seen tariffs imposed on a range of goods.
It also highlighted a slowdown in the UK housing market this year, which has been “concentrated in London”, where mortgage completions are down 12% on 2016.
But the Bank thinks that weakness might just be specific to the capital and may not say much about the prospects for the UK housing market as a whole.
What happens next?
The Bank is sticking to its guidance that interest rates will continue to head higher, but only at gradual pace and to a limited extent.
The financial markets have taken this on board and are forecasting one, and perhaps two, rises of 0.25% before 2020.
It also seems unlikely the UK will return to interest rates of 5% and above. In its inflation report, the Bank published what it thinks is the natural interest rate for the UK economy.
It puts that at between 2% and 3%.
That relatively low rate is partly due to an ageing population.
Older people tend to save more and in the future, that will provide a greater pool of savings for lending to households and industry and help prevent the economy from overheating.
Scottish Debt Help® is a trading style of J3 Debt Solutions Ltd. Visit J3 Debt Solutions – www.j3debt.co.uk.
Free and Impartial advice, debt counselling, debt adjustment and credit information services are available from the Money Advice Service and you can find out more by contacting them. The solutions on this page are only available if you reside in Scotland.
J3 Debt Solutions Limited is a firm of Licenced Insolvency Practitioners. Jamie Carmichael is authorised to act as an Insolvency Practitioner in the UK by the Institute of Chartered Accountants of Scotland. J3 Debt Solutions Limited is a Scottish Registered Company (SC612868) and has its registered office at Suite 144, No. 1 West Regent Street, Glasgow, G2 1RW. The Company’s Data Protection Registration Number is ZA474414.
Cookie information is stored in your browser and performs functions such as recognising you when you return to our website and helping our team to understand which sections of the website you find most interesting and useful.
Strictly Necessary Cookies
Strictly Necessary Cookies are enabled at all times and are required for the website to function properly.
If you disable this cookie, we will not be able to save your preferences. This means that every time you visit this website you will need to enable or disable cookies again.
3rd Party Cookies
This website uses tracking codes from Google Analytics, Google Search, Facebook, Bing and others. This helps us monitor our website performance and how people find our website.
Keeping these cookies enabled helps us to improve our website and overall service.
Please enable Strictly Necessary Cookies first so that we can save your preferences!