Bank of England holds base rate as business and Brexit uncertainty takes hold
Members of the Monetary Policy Committee (MPC) voted unanimously to hold the base rate at 0.75% in November, after last raising it from 0.5% in August.
The committee noted that GDP is expected to grow by around 1.75% per year on average and household consumption is set to grow modestly relative to historical rates, broadly in line with real incomes.
However, the MPC said that business investment was more subdued than previously anticipated as the effect of Brexit uncertainty has intensified.
Notes from the meeting held last night, stated: “The economic outlook will depend significantly on the nature of EU withdrawal, in particular the form of new trading arrangements, the smoothness of the transition to them and the responses of households, businesses and financial markets.
“At this meeting the MPC judged that the current stance of monetary policy remained appropriate. Any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.”
It added that CPI inflation is projected to remain above the target for most of the forecast period (to 2021), before reaching 2% by the end of the third year.
Alistair Wilson, Zurich’s head of retail platform strategy, said with inflation falling lower than expected at the last count, and wages having risen at the fastest pace in nearly a decade, this has eased pressure to raise rates in the immediate future.
Tom Stevenson, investment director for Personal Investing at Fidelity International added: “It is not hard to see why the Bank is treading carefully.
“Raising rates prematurely risks tightening the squeeze further on a UK economy that is struggling to return to its pre-crisis rate of growth.
“The OBR’s forecasts suggest that is unlikely to change during the ongoing period of Brexit-related uncertainty.
“The housing market, which is key to the health of the British economy, is slowing. Wage growth is barely positive in real terms. Manufacturing is struggling.”
Bank of England hikes base rate to 0.75%
Members of the Monetary Policy Committee (MPC) voted unanimously to raise the base rate by 0.25%, taking it to 0.75%.
The last time the base rate was above 0.5% was in February 2009 when it stood at 1%, and in November 2017, interest rates rose from 0.25% to 0.5%, 15 months after they were dropped to an unprecedented low.
The move came as no surprise as the markets were pricing in a 91% chance of a rate hike, but it does come in the face of weak and fragile UK economic growth figures.
The MPC said that the recent data which showed a dip in output in the first quarter was temporary, as momentum recovered in the second quarter. GDP is also expected to grow by 1.75% per year on average and unemployment is low, and is projected to fall a little further.
Turning to inflation, which stood at 2.4% in June, the MPC said it lingers above the 2% target due to “external cost pressures“, resulting from sterling’s past depreciation and higher energy prices. These pressures are projected to ease over the forecast period while domestic cost pressures are expected to rise.
Minutes from the MPC meeting noted: “Taking these influences together, and conditioned on the gently rising path of Bank Rate implied by current market yields, CPI inflation remains slightly above 2% through most of the forecast period, reaching the target in the third year.
“The MPC continues to recognise that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal.
“The Committee judges that an increase in Bank Rate of 0.25 percentage points is warranted at this meeting.
“The Committee also judges that, were the economy to continue to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon. Any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.”
For more, see our article Bank of England raises interest rates: What it means for mortgages
Bank of England interest rate rise: Three brokers offer a mortgage view
Lenders are expected to waste little time increasing their rates in response to today’s hike.
That means thousands of homeowners could be paying more for their mortgage by as early as next month.
Three mortgage advisers offer suggestions on what this means for borrowers:
‘Fix offers better value than trackers at present’
Lea Karasavvas, managing director at Prolific Mortgages, says: “As the uncertainty mounts regarding Brexit, I see the base rate only going one way.
“With 10-year fixed rates still available at circa 2.49%, rates are still unbelievably low and many people are living in a false economy in the belief rates will continue to stay this low. I do see incremental increases coming over time, and only really in one direction so I would suggest a fix offers better value than the trackers at present as the margin of differential is so minimal.
“The only real benefit of trackers over the majority of fixed products are that they are often penalty-free, giving them a little more flexibility, but I only see the base rate moving in one direction.
“For people sitting on a variable I would advise that they first check with an adviser as to whether they are able to change based on their criteria and to ensure there are no penalties in doing so, and if so, I would suggest it may be prudent to assess the market and look at the options available to them.
“Some people are still enjoying tracker products on incredible low margins from 10 years ago. I still have clients on products at 0.17% below base and on margins such as these I would still suggest there is value here. However more recent clients could be sitting on higher margins above base, and they could see better value locking in.”
‘Call to action rather than a call to panic’
Malcolm Wallace, director of Parsonage Financial Planning, says: “The announcement should be a call to take action rather than a call to panic. The first thing I would advise would be to check the documentation that outlines your initial mortgage offer as this should disclose an estimate of the cost of any increase.
“Homeowners who do have a flexible mortgage should carefully consider how much more they can afford towards monthly repayments and assess the bigger picture – for example, are there other areas that you can cut back on in order to make up the costs? Despite forward planning, the average UK household has limited flexibility when it comes to upping their mortgage, and if this is the case, now is the time to think about switching to a fixed mortgage.
“The prospect of switching from a flexible to a fixed mortgage may sound like a time-consuming and expensive task in itself, but this isn’t always the case. What most home owners don’t realise is that you can change to a fixed rate mortgage without the hassle of changing lender.”
‘Rate increase is a trigger to take action’
David Hollingworth of L&C Mortgages, says: “People on standard variable rate (SVR) mortgages are of course the most vulnerable to rate increases as they will see a rise in their monthly payment, despite already typically paying over the odds. Any rate increase is likely to act as a trigger to those borrowers who have simply not got round to reviewing their mortgage to take action. Shopping around for a new deal could offer the chance to not only make substantial savings, but also to protect against any further rate rises.
“Many borrowers are opting to fix their rate at the moment given how competitive the current rates are and against the backdrop of the potential for rising interest rates. Fixing the rate will do exactly what it says on the tin and give borrowers the certainty of payment and ability to budget with confidence.
“Given inflationary pressures on other household costs, being able to lock down the biggest outgoing will appeal to many. Fixed rates are on offer between two and 10 years although they will typically require borrowers to lock in their rate during the fixed rate period. It’s therefore important to think about how much flexibility might be required in future, as an early repayment charge can amount to thousands. We’re seeing more borrowers opt for the medium term by fixing for five years.
“Of course, mortgage rates may not hold steady in the wake of a rate rise. Fixed rates had already begun to rise before the last rate rise in November 2017 and there’s been further drift upwards since then. With a further rate rise that trend may continue, even though it may have already been priced in to a degree. It may therefore make sense to consider the options sooner rather than later to avoid disappointment.”
Inflation risks mean Bank of England should not delay rate rises – MPC member
Economist and MPC member Ian McCafferty suggested in an interview with Reuters, there were “potential modest upside risks” to inflation forecasts which necessitated taking action on interest rates.
McCafferty, who was chief economic adviser to the Confederation of British Industry for a decade, said wage growth could actually be stronger than is generally expected by his colleagues.
He also noted that it was not a foregone conclusion that the inflation pressure from the Brexit vote in June 2016 had cleared either.
As a result, McCafferty said the bank “should not dally when it comes to tightening policy modestly”.
He was one of two members who voted for rates to rise in March, but did not confirm if he would carry this vote over to the next MPC meeting in May.
Since the Bank of England raised its Bank Base Rate for the first time in a decade in November, it has indicated it may need to accelerate the speed and scale of its future increases, with many analysts expecting this to mean another rise in May.
Bank Rate held at 0.25% despite rising inflation
The committee also voted unanimously to continue with the programmes of sterling non-financial investment-grade corporate bond purchases, totalling £10bn, and to maintain the stock of UK government bond purchases at £435bn.
Its decision came as consumer-facing sectors faced a slowdown in the first quarter, partly reflected by the impact of sterling’s depreciation – 16% below its November 2015 peak – although it did appreciate 2.5% between February and May this year.
The depreciation of sterling has also fed through to consumer prices, but the MPC noted the impact was partially offset by continued subdued growth in domestic costs, with wage growth being notably weaker than expected.
However, it said that wage growth is expected to “recover significantly” but as part of its quarterly inflation report also published today, it expects inflation to rise further above the 2% target (currently 2.3%, expected to reach 2.7% in June), again citing the fall in sterling for the overshoot.
Ben Brettell, senior economist at Hargreaves Lansdown, said: “The economy is battling some significant headwinds at present, as higher inflation puts the squeeze on consumers’ real incomes ahead of June’s general election and the start of Brexit negotiations. The economy has surprised on the upside since last summer’s referendum, powered by a resilient consumer, but it looks like households are now starting to feel the pinch from the current bout of inflation. The Bank expects inflation to peak a little below 3% in the fourth quarter.
“However, it also looks likely that a pickup in exports and business investment could help offset any weakness in the consumer sector.
“Unsurprisingly interest rates were left unchanged, with just Kristin Forbes voting for a 0.25% rise to 0.5%. However, the Bank also warned that rates may have to rise sooner and faster than the market currently expects. Wage growth, which has been notably lacklustre of late, is seen picking up sharply next year. It might not take much positive economic data to persuade further MPC members to join Forbes and vote to hike rates, though it should be noted that she is due to leave the MPC at the end of June.”
Interest rates on hold at 0.5% for yet another month
The Bank of England’s Monetary Policy Committee (MPC) voted unanimously yesterday to hold the Bank Base Rate at its record low of 0.5% – the 88th month in a row.
This is good news for mortgage borrowers on a variable rate deal as the Base Rate influences wider interest rates, so it’s unlikely they will see an increase in their mortgage pay rate in the near future.
However, for savers, they’ll have to put up with dismal savings rates for longer as the MPC looks to meet its 2% inflation target to “sustain growth and employment”.
The MPC said the 12-month CPI inflation was 0.3% in May which remains well below the 2% inflation target. The shortfall is owing to “unusually large drags from energy and food prices”.
But the report stated that an increasing range of financial asset prices have become more sensitive to market perception of the likely outcome of the forthcoming EU referendum, adding that “the most significant risk to the MPC’s forecast concern the referendum.”
It stated: “On the evidence of the recent behaviour of the foreign exchange market, it appears increasingly likely that, were the UK to vote to leave the EU, sterling’s exchange rate would fall further, perhaps sharply.
“In addition, UK short-term interest rates and measures of UK bank funding costs appear to have been materially influenced by opinion polls about the referendum. These effects have also become evident in non-sterling assets: market contacts attribute much of the deterioration in global risk sentiment to increasing uncertainty ahead of the referendum.”
The MPC added that while consumer spending has been solid, the uncertainty about the referendum is leading to “delays to major economic decisions.”
Maike Currie, investment director for personal investing at Fidelity International, said: “One week before the EU Referendum vote, it comes as no surprise that the Bank of England has decided to maintain interest rates at a record low.
“The nation gearing up for the vote next week is a short-lived uncertainty, but there are more persistent economic factors causing a drag on growth. Weak inflation, a slowing economy and low wage growth presents a cocktail of concerns which has no doubt contributed to this decision.”