As expected, Mark Carney and the Bank of England have risen the UK interest rate for the first time in 10 years, stating that: “The time has come to ease our foot off the accelerator”.
The rate has risen from 0.25% to 0.5%, returning it to the same levels it was prior to a drop following the Brexit referendum result in June 2016, a move designed to stabilise the economy during a tumultuous market in the wake of the landmark vote. The MPC (Monetary Policy Committee) voted by a score of 7-2 in favour of an increase, but has sought to curb any major fears of a quick rise and retain a level of cautiousness by stating in its report that, “All members agree that any future increases in Bank Rate will be at a gradual pace and to a limited extent”.
The rate rise has been expected to happen for some time and is seen by many as a direct response to protect British households from creeping inflation. Mark Carney, Governor of the Bank of England, is tasked with keeping inflation at a target mark of 2%, however September saw it rise to 3%, its highest figure since 2012.
The rate increase was also announced in tandem with an upgrade on the growth forecast for this year, which has been raised from 1.3% to 1.5%. The projections for 2018 have also been upgraded, and while this may sound promising for those who championed leaving the EU, the Bank of England has been very clear in asserting its position that Brexit is, and will remain, harmful to the UK economy. The report states that Brexit is causing ‘noticeable impact on the economic outlook’, citing the ‘uncertainties associated with Brexit’ and ‘Brexit-related constraints’, as having a detrimental effect on the financial system.
For the average UK citizen, there are some concerns that the cost of borrowing will now increase and therefore negatively impact those applying for mortgages and loans. The move is also expected to affect homeowners on interest only mortgages who have been enjoying low repayments with the potential to increase monthly payments. With nearly 4 million homeowners currently on variable or base-rate trackers, an increase of up to £12 per month could be seen for those with the average repayment loan of around £90,000 on their mortgages. There is also concern that many people who have never seen a rate-rise in their lives will be caught unexpected, and this could further squeeze a population where falling wages and consumer debt are prevalent.
The British pound fell sharply immediately after the announcement, but many analysts are still seeing this as a ‘one and done’ rise and do not expect to see any further changes emanating from the Bank of England until the terms of Britain’s Brexit is defined.