B of E Close To Increasing Interest Rates ?

16/06/2017

The Times online reports that The Bank of England is as close to raising interest rates as it has been in six years after three policymakers broke ranks this month to call for an immediate increase that would punish borrowers but provide welcome relief to savers.

Ian McCafferty and Michael Saunders joined Kristin Forbes in voting to reverse the Bank’s decision to cut rates to 0.25 per cent last August in the wake of the Brexit referendum. The other five members of the monetary policy committee, which is one short of its usual nine, chose to keep rates on hold.

It was the first time that three policymakers had wanted to increase rates since 2011 and the first time a single vote could have swung the decision since June 2007. As the governor has the final say, the result would have been a quarter-point rate increase to 0.5 per cent had Mark Carney also voted for one.

The last time rates rose was almost a decade ago, in July 2007, and they have been at 0.5 per cent or lower since March 2009. With inflation now creeping into the economy and squeezing households, the Bank is facing pressure to respond but it is reluctant to do so for fear of the damage higher rates may do to growth by hammering family incomes even further.

The Bank yesterday expressed concerns about inflation, which has hit a four-year high of 2.9 per cent. In May the Bank expected inflation to peak at 2.8 per cent at the end of the year, above its 2 per cent target.

It had previously said it would tolerate above-target inflation but yesterday predicted inflation would exceed 3 per cent and said its tolerance was “reduced” as a result.

Such a sudden and surprise shift on the committee, from 7-1 to 5-3, would normally have triggered a big market response. Investors barely responded, however, and by the end of the day markets were still pricing the first rate rise to come midway through 2019.

Sterling jumped 0.5 cents against the dollar but quickly returned to $1.2751 to close unchanged. It rose 0.72 cents against the euro to €1.1439.

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Written by Colin Caulfield | Director

Colin is a Chartered Financial Planner & Pension Adviser Of the Year Read more >>

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