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| The Bank of England could no longer bottle it over an interest rate rise | The Bank of England could no longer bottle it over an interest rate rise |
| (25 days later) | |
| It’s been a long, long time coming. The last time the Bank of England raised interest rates in July 2007, Sir Mervyn King was in charge at Threadneedle Street, Barack Obama had only recently said he would run to be US president and Gordon Brown had finally replaced Tony Blair as prime minister. | It’s been a long, long time coming. The last time the Bank of England raised interest rates in July 2007, Sir Mervyn King was in charge at Threadneedle Street, Barack Obama had only recently said he would run to be US president and Gordon Brown had finally replaced Tony Blair as prime minister. |
| Official borrowing costs are now back to where they were between early 2009 and August 2016, when there was an emergency cut in rates following the Brexit vote. The recession the Bank feared did not materialise and so – with inflation above its 2% target and the unemployment rate at its lowest in more than four decades – there has been a modest tightening of policy. | Official borrowing costs are now back to where they were between early 2009 and August 2016, when there was an emergency cut in rates following the Brexit vote. The recession the Bank feared did not materialise and so – with inflation above its 2% target and the unemployment rate at its lowest in more than four decades – there has been a modest tightening of policy. |
| The Bank was keen to point out that it was still providing help to an economy that has weakened noticeably since the turn of the year, just not quite as much stimulus as hitherto. That’s clearly correct: with the cost of living rising at 3% annually and bank rate at 0.5%, real (inflation-adjusted) interest rates are still negative. | The Bank was keen to point out that it was still providing help to an economy that has weakened noticeably since the turn of the year, just not quite as much stimulus as hitherto. That’s clearly correct: with the cost of living rising at 3% annually and bank rate at 0.5%, real (inflation-adjusted) interest rates are still negative. |
| Lenders have already bumped up the cost of fixed rate mortgages ahead of the Bank of England’s decision to raise base rate from 0.25% to 0.5%, and mortgage borrowers on tracker and variable rates will see their monthly payments become more expensive in the coming days. | Lenders have already bumped up the cost of fixed rate mortgages ahead of the Bank of England’s decision to raise base rate from 0.25% to 0.5%, and mortgage borrowers on tracker and variable rates will see their monthly payments become more expensive in the coming days. |
| Savers will gain as banks and building societies improve the rates available on deposit and Isa accounts, although increases are unlikely to come for several weeks. | Savers will gain as banks and building societies improve the rates available on deposit and Isa accounts, although increases are unlikely to come for several weeks. |
| How much consumers and businesses cut back on spending and investment in the face of higher rates will depend on signals from the Bank about the trend for future increases. | How much consumers and businesses cut back on spending and investment in the face of higher rates will depend on signals from the Bank about the trend for future increases. |
| Even so, the monetary policy committee’s decision to raise rates now is not entirely convincing. Sure, inflation stands at 3%, but that is due to two one-off factors – the fall in sterling following the EU referendum and rising oil prices. In the past, the Bank has “looked through” temporary increases in inflation and could have done so again. | Even so, the monetary policy committee’s decision to raise rates now is not entirely convincing. Sure, inflation stands at 3%, but that is due to two one-off factors – the fall in sterling following the EU referendum and rising oil prices. In the past, the Bank has “looked through” temporary increases in inflation and could have done so again. |
| Nor has there been any real evidence thus far of falling unemployment leading to higher wage growth. The Bank believes that pay will soon rise because there are few spare workers around, but it has been whistling this tune ever since Mark Carney became governor four-and-a-half years ago. | Nor has there been any real evidence thus far of falling unemployment leading to higher wage growth. The Bank believes that pay will soon rise because there are few spare workers around, but it has been whistling this tune ever since Mark Carney became governor four-and-a-half years ago. |
| Indeed, the two dissenting voices on the MPC – Jon Cunliffe and Dave Ramsden – said unemployment could carry on falling from its current rate of 4.3% without wage growth responding. | Indeed, the two dissenting voices on the MPC – Jon Cunliffe and Dave Ramsden – said unemployment could carry on falling from its current rate of 4.3% without wage growth responding. |
| The Bank’s decision was based on four key judgments: that continued strong growth in the global economy helps the UK; that the economy rebalances towards investment and exports; that diminished slack in the labour market and poor productivity performance mean that even a modest increase in demand will lead to rising inflation; and that domestic inflationary pressures will start to build even as the impact of higher import prices fades. | The Bank’s decision was based on four key judgments: that continued strong growth in the global economy helps the UK; that the economy rebalances towards investment and exports; that diminished slack in the labour market and poor productivity performance mean that even a modest increase in demand will lead to rising inflation; and that domestic inflationary pressures will start to build even as the impact of higher import prices fades. |
| There was, though, an added consideration – namely that a no-change decision would have been seen by the financial markets as the Bank bottling it. For the past couple of months, it has primed the City for a rate rise and there would have been repercussions had the bank rate been left at 0.25%. | There was, though, an added consideration – namely that a no-change decision would have been seen by the financial markets as the Bank bottling it. For the past couple of months, it has primed the City for a rate rise and there would have been repercussions had the bank rate been left at 0.25%. |
| In particular, there would have been a danger of a fresh fall in the pound, which would have given another upward twist to import prices, leading to an even-more pronounced squeeze on living standards. | In particular, there would have been a danger of a fresh fall in the pound, which would have given another upward twist to import prices, leading to an even-more pronounced squeeze on living standards. |
| As the Bank knows full well, this was not an ideal time to be raising rates, even though it believes they would need to go to 2% before households with mortgages would really start to feel the pain. The minutes of the MPC meeting note that Brexit uncertainty is weighing on the economy and recent reports from the high street suggest a grim Christmas is in store for retailers. | As the Bank knows full well, this was not an ideal time to be raising rates, even though it believes they would need to go to 2% before households with mortgages would really start to feel the pain. The minutes of the MPC meeting note that Brexit uncertainty is weighing on the economy and recent reports from the high street suggest a grim Christmas is in store for retailers. |
| So, having boxed itself into a corner, the Bank has sought to reassure the public that it is expecting only two more quarter-point increases in the next two years and will assess the impact of the first rate rise in more than a decade before moving again. This – although it sounds like a contradiction in terms – was a dovish rate rise. | So, having boxed itself into a corner, the Bank has sought to reassure the public that it is expecting only two more quarter-point increases in the next two years and will assess the impact of the first rate rise in more than a decade before moving again. This – although it sounds like a contradiction in terms – was a dovish rate rise. |