This article is from the source 'guardian' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at https://www.theguardian.com/business/2018/aug/02/bank-of-england-raises-interest-rates

The article has changed 7 times. There is an RSS feed of changes available.

Version 2 Version 3
Bank of England raises interest rates to 0.75% Bank of England raises interest rates to 0.75%
(about 5 hours later)
The Bank of England has raised interest rates above the emergency level introduced straight after the financial crisis, despite mounting fears about the economic impact of Britain crashing out of the EU without a deal. The Bank of England has raised interest rates above the emergency level introduced after the financial crisis despite mounting fears about the economic impact of Britain crashing out of the EU without a deal.
Signalling the gradual return of higher borrowing costs, Threadneedle Street raised interest rates to 0.75% from 0.5% – the level they were dropped to in March 2009 as the economy lurched through the last recession. Citing concern that the lowest unemployment rate since the mid-1970s risked re-igniting wage pressure, Threadneedle Street raised interest rates to 0.75% from 0.5% – the level they were dropped to in March 2009 as the economy lurched through the last recession.
The Bank’s nine-member monetary policy committee voted unanimously for the increase, judging that the economy had bounced back from a soft patch earlier this year triggered by the freezing weather and heavy snowfall from the “beast from the east”. Mark Carney, the Bank’s governor, told businesses and households there would be further increases in borrowing costs if economy continued to recover from a softer patch earlier this year, but he also signalled willingness to reverse the quarter-point increase in the event of a disorderly Brexit.
While warning Brexit could blow the economy off course, the MPC said recent readings for economic growth “appear to confirm that the dip in output in the first quarter was temporary, with momentum recovering in the second quarter”. “If there is a major shift [in the Brexit talks]... then that could have consequences for monetary policy,” he said. “We can adjust when necessary.”
The rate setters added that if the economy continued to recover as forecast, an “ongoing tightening of monetary policy” meaning more interest rate rises would be required to return inflation towards the Bank’s 2% target over the next few years. The pound fell on foreign exchanges over speculation the Bank would be blocked from tweaking the cost of borrowing until after Britain formally left the EU next March. Sterling dropped by almost a cent against the dollar and the FTSE 100 slipped by more than 1%.
Having made the call to move interest rates for only the third time in the past decade, the Bank’s latest decision comes amid growing fears over Brexit, with Theresa May facing parliamentary divisions over her plan. Charles Hepworth of the City investment management company GAM said: “The Bank of England’s response in a few months’ time could look very different should the Brexit cliff edge slip nearer despite them saying more hikes will be needed.”
Raising interest rates will mean higher borrowing costs on mortgages and loans for hard-pressed consumers and businesses as they adapt to Britain leaving the EU. In delivering its verdict on Thursday, the Bank’s nine-member monetary policy committee voted unanimously for the increase, judging that the economy had bounced back from the effects of the “beast from the east” earlier this year.
An extra 0.25% interest will add £12 a month to a £100,000 repayment mortgage and £25 on a £200,000 loan. However, nearly 70% of homebuyers have fixed-rate mortgages, so will be unaffected. The MPC said recent readings for economic growth “appear to confirm that the dip in output in the first quarter was temporary, with momentum recovering in the second quarter”.
John McDonnell MP, the shadow chancellor, said the rate rise would be bad news for hard-pressed households: “Given recent revelations that households are spending more than they receive in income for the first time since 1988, today’s rise will be a blow to those facing high levels of personal debt.” It also said an “ongoing tightening of monetary policy” meaning more interest rate rises would be required if the economy continued to recover as forecast to return inflation toward the Bank’s 2% target over the next few years.
He added: “The Tories’ economic failure is making life difficult for families across the UK. They must change tack and end austerity once and for all.” The Bank’s decision, only the third change in interest rates in the last decade, comes as fears mount over Brexit, with Theresa May facing parliamentary divisions over her plan.
The British Chamber of Commerce said the increase was ill-judged and could hit confidence in the economy. Suren Thiru, head of economics at the BCC, 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.” Raising rates will mean higher borrowing costs on mortgages and loans for consumers and businesses as they adapt to Britain leaving the EU. An extra 0.25% will add £12 a month to a £100,000 repayment mortgage and £25 on a £200,000 loan. Nearly 70% of homebuyers, however, have fixed-rate mortgages so will be unaffected.
However, Andrew Sentance, senior economic adviser at accountants PwC and a former MPC rate-setter, said the rate hike “makes sense both from a short-term perspective and in terms of a sustainable long-term monetary strategy”. John McDonnell, the shadow chancellor, said the rate rise would be bad news for hard-pressed households: “Given recent revelations that households are spending more than they receive in income for the first time since 1988, today’s rise will be a blow to those facing high levels of personal debt.”
Several economists had urged the Bank to keep rates on hold to help support jobs and growth amid the uncertainty. Business groups also criticised the decision given the mounting Brexit uncertainty which, along with higher borrowing costs, stood to deter firms from investing in Britain. Suren Thiru, the 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.”
Mark Carney, the Bank’s governor, had previously said it could use an emergency rate cut in the event of a no-deal Brexit. While Threadneedle Street has a mandate to steer inflation towards 2%, it can deviate to support the economy through difficult periods. There has been some better news for the economy in recent months, with the summer heatwave and royal wedding giving the country a shot in the arm by encouraging a rise in consumer spending. Inflation has fallen from its highest level in five years, and unemployment remains at its lowest level since the mid-1970s.
There has been some better news for the economy in recent months, with the summer heatwave and royal wedding giving the country a shot in the arm. Inflation has begun to fade from the highest level in five years, while unemployment also remains at the lowest level since the mid-1970s. Factory output has slowed, however, as global economic growth softens and Donald Trump slaps import tariffs on some of the US’s biggest trading partners, including the EU and China. Despite the low levels of unemployment in the UK, pay rises for British workers remain elusive.
However, factory output has slowed amid softer global economic growth, as Donald Trump has slapped import tariffs on some of the US’s biggest trading partners, including the EU and China. Despite the low levels of unemployment in the UK, pay rises for British workers also remain elusive. In giving its rate decision, the MPC said it believed wages should begin to rise over the next three years, helped by the low levels of unemployment, while economic growth should average around 1.75% per year.
But in giving its verdict for higher rates, the MPC said it believed wages should begin to rise over the next three years, helped by the low levels of unemployment, while economic growth should average around 1.75% per year. It said the pay rise for public sector workers following the government’s removal of the 1% cap may spill over to help workers in the private sector demand better wages.
It said the pay rise for public sector workers, following the removal of the 1% cap by the government, had the possibility of spilling over to help workers in the private sector demand better wages. Some economists argue that the unemployment rate of 4.2% masks the precarious nature of work for many people, which could hold back wage growth as workers’ bargaining power remains subdued. The most recent official figures show wage growth dropped to its lowest level in six months in the three months to May.
Some economists have argued the unemployment rate of 4.2% masks the precarious nature of work for many people, which could hold back wage growth as workers’ bargaining power remains subdued. The most recent official figures show wage growth dropped to the lowest level in six months in the three months to May. David Blanchflower, a former MPC member, said: “The economics of walking about suggests that the MPC has no idea what is going on for ordinary people outside London. They are not getting 3% wage rises and don’t expect them.”
Having previously delayed raising interest rates in May, preferring to wait and see if the economy would recover as hoped, the decision to raise rates had been widely expected this time. However, the unanimous vote is likely to stoke speculation that further increases are around the corner. Having previously delayed raising interest rates in May, preferring to wait and see if the economy would recover, the decision had been widely expected this time. The unanimous vote is likely to stoke speculation that further increases are around the corner.
Outlining its decision, the Bank said interest rates were unlikely to return to the levels seen before the financial crisis, when they were more commonly set above 5%. Outlining its decision, the Bank said interest rates were unlikely to return to the levels seen before the financial crisis, when they were more commonly set above 5%. Any future increases in the cost of borrowing are likely to come at a “gradual pace and to a limited extent,” it said.
It said weaker levels of productivity growth – a measure of economic output per hour of work – over the past decade meant there was an “equilibrium interest rate”, whereby it would neither be acting to stoke demand or depress economic growth, of between 2% and 3%.
Any future increases in the cost of borrowing are therefore likely to come at a “gradual pace and to a limited extent,” it added.
Interest ratesInterest rates
EconomicsEconomics
Bank of EnglandBank of England
Economic policyEconomic policy
Monetary policy committeeMonetary policy committee
Economic growth (GDP)Economic growth (GDP)
newsnews
Share on FacebookShare on Facebook
Share on TwitterShare on Twitter
Share via EmailShare via Email
Share on LinkedInShare on LinkedIn
Share on PinterestShare on Pinterest
Share on Google+Share on Google+
Share on WhatsAppShare on WhatsApp
Share on MessengerShare on Messenger
Reuse this contentReuse this content