Britain's interest rates are on the rise – finally. After nine years and five months of record low interest rates, Bank of England base rate has been raised to 0.75% from 0.5%. The Monetary Policy Committee voted to raise interest rates unanimously at 9 votes to 0.
The news comes as no surprise to the market, which expected the Committee to raise rates this month, forecasting the rise with 90% certainty. This increase takes base rate to the highest level since March 2009, when the MPC voted to decrease it from 1% to 0.5%. Rates had steadily declined from 5.75% in July 2007, in reaction to the global financial crisis in order to stimulate the UK economy out of recession.
The rate was dropped further in August 2016 to 0.25% to stave off economic contraction following the Brexit vote. This move was reversed in November last year, making today’s announcement the second rate rise in nine months – the last time the Bank raised rates at that frequency was more than a decade ago.
The Bank also issued its latest Inflation Report today showing the Consumer Price Index is now 2.4%, pushed up by weak sterling and high energy prices. This is above the UK inflation target of 2%.
The Committee voted to retain quantitative easing at its current level and agreed "that an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target". The Committee stated that any future interest rate increases were likely to be "at a gradual pace and to a limited extent".
Now is the Time to Act
The Bank faced pressure to raise rates today or risk significant damage to its reputation. Carney, and other Bank employees, have been signalling the move for some time, and with unemployment at a 45-year low, and the UK economy expanding – albeit at a minor rate – now is the time to act.
When Carney was appointed in the summer of 2013 he introduced forward guidance indicating that when unemployment dropped below 7% the Bank would raise rates. Unemployment dropped to 6.9% just six months later, but rates held fast – earning Carney the moniker of the “unreliable boyfriend”.
For some, today’s rate rise is too little, too late; economists worry that the Bank has left itself no wiggle room should the UK economy face a downturn – and warn this move is likely to be in isolation.
“The Bank is unlikely to be able to start a rate hiking path that the Fed has embarked on,” says Thomas Wells, manager of the Smith & Williamson Global Inflation-Linked Bond Fund. “The macro backdrop in the UK simply won’t support much further tightening of interest rates this year. Whilst the notion of normalising rates will continue, it is actually meaningless. Rates have been below 1% since 2009, so in effect, we are in a new normal of much lower rates and that is going to persist.”
Fed Holds Rates, Indicates Rise Next Month
The US Central Bank the Federal Reserve held steady this week, choosing not to raise rates, but indicated it will raise rates next month, thanks to a strong economic backdrop. It cited the strong jobs market, and a growth in both household spending and business fixed investment.
“In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realised and expected economic conditions,” a statement released yesterday said.
The Fed rate is currently 2%. The Federal Open Market Committee last voted to raise rates in May, following hikes in March and November.
