Tuesday 21 November 2017

Why has the Bank raised rates and why are they set to rise further?

The Bank’s rate rise reverses the emergency cut seen in August 2016, but borrowers have been left wondering when rates will be hiked next.

State pension age report
State pension age report

By Holly Williams, Press Association Deputy City Editor

The Bank of England’s milestone rate hike marks the first rise since July 2007, when Gordon Brown had just taken over from Tony Blair as prime minister.

It reverses the post-Brexit emergency cut seen in August 2016 when the Bank sought to shore up the economy after the shock vote to leave the EU.

But borrowers will be wondering if this is the start of a cycle of rate increases.

Here are some of the key questions and answers surrounding the Bank’s interest rates decision.

:: Why is the Bank raising rates now?

The Bank is looking to cool surging inflation, which has been sent higher by sharp falls in the pound since the Brexit vote.

Consumer Prices Index (CPI) inflation hit 3% in September – its highest level for more than five years – and the Bank has warned it is set to peak at around 3.2% this autumn.

The Bank is tasked by the Government with keeping CPI at 2%, but has been tolerating higher inflation amid uncertainty caused by the Brexit vote to prevent shocks to the economy.

Policymakers have become less tolerant of surging inflation, given that the economy has performed better than feared since the EU referendum and with wider inflationary pressures now building.

:: Is the economy strong enough to withstand a rate rise?

Growth edged up to a better-than-expected 0.4% in the third quarter from 0.3% in the previous three months, according to last week’s first official estimate.

This suggests the economy is stable and no longer in need of the emergency boost delivered by the Bank after last year’s Brexit vote.

But some economists have voiced fears over the timing of a rate hike, amid uncertainty caused by Brexit negotiations and a shaky consumer outlook as household finances are squeezed by rising inflation and paltry wage growth.

:: What will an increase mean for households?

It will come as a blow to nearly four million mortgage borrowers on variable rate deals, although it will offer some relief to savers who have seen their nest eggs decimated by surging inflation and negligible returns.

But 60% of mortgage borrowers are on fixed rate deals, meaning that any impact is expected to be modest.

Savers are meanwhile expected to see a small boost to returns, with far fewer on fixed interest deals.

:: Where will rates go from here?

The Bank signalled another two hikes may be needed over the next three years to bring inflation back to target.

Its forecasts are based on financial market expectations for rates to rise to 1% by the end of 2020, with another pencilled in for late next year.

But it has stressed further rises will be “very gradual”, while the timing and degree of further hikes are highly dependent on the economy and Brexit impact.

Press Association

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