Will interest rates rise this year?
Bank of England says higher inflation and a pick-up in growth could lead to first rate hike in a decade
The Bank of England paved the way to raise interest rates for the first time in a decade yesterday, after its main decision-making body said rising inflation and stronger than expected growth could lead to a rate hike “in the coming months”.
While the nine-strong Monetary Policy Committee, which is responsible for setting the UK’s base rate of interest, voted 7-2 to hold rates at 0.25%, it was talking in “much stronger terms” about an increase says the BBC.
In the minutes of its latest meeting, the nine policymakers said there was a “slightly stronger picture” for the economy since its forecasts last month thanks to signs of a firmer housing market, stronger employment and a rebound in retail and new car sales meaning “some withdrawal of monetary stimulus was likely to be appropriate over the coming months”.
Subscribe to The Week
Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.
Sign up for The Week's Free Newsletters
From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.
From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.
Some analysts think this rise could come as soon as the next MPC meeting in November, when the bank will also release its latest Inflation Report.
Speaking to the Daily Telegraph, Nick Dixon, investment director at Aegon said over the next 12-24 months he expected “rates will rise higher and faster than market expectations.”
“This will be good news for those seeking annuity income or with cash savings and bad news for mortgage holders,” he added.
But others are less convinced.
“There’s a good argument that the UK economy isn’t ready for higher borrowing costs, given wage growth is weak, as it enters the teeth of the Brexit negotiations” says The Guardian.
This view is backed up by Yael Selfin, chief economist at KPMG, who says the bank is likely to tread very cautiously.
“The meagre wage growth we are seeing in spite of these trends is making it harder for the Bank of England to raise rates, especially as any rise will put yet more pressure on households who are already under strain due to a fall in their real earnings”.
The Brexit vote “has put the BoE in a dilemma as it sought to balance the need to support the economy through the shock of leaving the European Union in March 2019 while also keeping a grip on fast-rising inflation” says Reuters. Earlier this week the Office for National Statistics reported inflation hit 2.9% in August, already higher than the Bank of England’s peak projection for the year.
Despite voting for a 97th consecutive time not to raise interest rates, “buried in the notes that accompanies their decision are two things that woke the currency markets up” says the BBC’s economics correspondent Andy Verity.
One is that the bank now judges that inflation will peak above 3% having previously said below that figure, the other is that the MPC does not agree with those economists who think rates don’t need to rise until 2019 or 2020.
The overall result of yesterday’s announcement, therefore, “is that traders in the City who had viewed a rate rise as more likely than not by February, now expect it by December” says Verity.
Create an account with the same email registered to your subscription to unlock access.
Sign up for Today's Best Articles in your inbox
A free daily email with the biggest news stories of the day – and the best features from TheWeek.com
-
'Good riddance to the televised presidential debate'
Instant Opinion Opinion, comment and editorials of the day
By Harold Maass, The Week US Published
-
Caitlin Clark the No. 1 pick in bullish WNBA Draft
Speed Read As expected, she went to the Indiana Fever
By Peter Weber, The Week US Published
-
Today's political cartoons - April 16, 2024
Cartoons Tuesday's cartoons - sleepyhead, little people, and more
By The Week US Published
-
How did America avoid a recession in 2023?
Today's Big Question A downturn was inevitable. Until it wasn't.
By Joel Mathis, The Week US Published
-
Will the UK economy bounce back in 2024?
Today's Big Question Fears of recession follow warning that the West is 'sleepwalking into economic catastrophe'
By Chas Newkey-Burden, The Week UK Published
-
What rising gold prices can tell us about the economy in 2024
The Explainer Market hits all-time high, boosted by a weakening US dollar and rising global tensions
By Flora Neville, The Week UK Published
-
Would tax cuts benefit the UK economy?
Today's Big Question More money in people's pockets may help the Tories politically, but could harm efforts to keep inflation falling
By The Week UK Published
-
Interest rates: more ‘trauma’ for households
Talking Point Latest hike will cause ‘plenty of pain for borrowers’
By The Week Staff Published
-
Interest rates rise to 5.25% for first time in 15 years
Speed Read Inflation is slowing but at 7.9% it remains well above the Bank of England’s 2% target
By Julia O'Driscoll Published
-
Five options to get the UK back to 2% inflation
feature Some economists believe alternatives to raising interest rates are in the country’s best interests
By Sorcha Bradley Published
-
Why aren’t soaring interest rates bringing down inflation?
Today's Big Question PM pins blame for stubborn inflation on fixed-rate mortgages, but economists say the picture is more nuanced
By Arion McNicoll Published