The UK’s first interest rate rise in 10 years

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The UK’s first interest rate rise in 10 years

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Yesterday, the Bank of England raised interest rates from 0.25 per cent to 0.5 per cent in the first rate increase since 2007. The move has of course split opinion, so we have collected the key commentary and takeaways for your easy digest.

Weighing up the decision

Firstly, it is important to note that seven out of nine members of the Monetary Policy Committee (MPC) voted in favour of the rise. Ahead of the announcement, charities and business groups claimed that it would put more unnecessary strain on home owners and companies. Nationwide’s chief economist, Robert Gardner, however, said that a rate hike would have a “modest impact on borrowers who are on variable rates”.

Yael Selfin, chief economist at KPMG UK acknowledged both a benefit and a cause for concern. “Long suffering savers will rejoice in today’s news of a first rise in UK interest rates in over a decade, but banks and insurers should also beware of the potential impact on their liabilities as their customers feel the strain. Consumers are already under pressure from falling real wages and the rise in consumer debt. So even a mild and gradual course of rate rises is likely to make a bigger impact this time.”

The benefit to savers, with more similar increases due to follow, may not be the shining beacon that one might presume. Analysis by consultancy Simon-Kucher showed that the UK’s big banks will actually be the largest beneficiaries, receiving a projected £274 million in profits over the next year as a result of the decision.

Brexit, of course, a key factor

With interest rates falling continually since the recession, this increase essentially reverses the last cut to 0.25 per cent in August 2016. Initially, the cut was due to be the first of a line of reductions as a way of dealing with the economic fallout in the wake of the Brexit vote two months earlier.

However, it seems Brexit is a key driver behind the new hike. With productivity struggling, economic growth has reduced and decision makers are paying down debt, holding on investment and sitting on key decisions until they have seen more detail around the UK’s deal with the EU, or lack thereof. The MPC has said that “Brexit-related constraints on investment and labour supply appear to be reinforcing the marked slowdown” and that the Brexit vote is having a “noticeable impact on the economic outlook”. They state that despite low growth, they need to put a halt to increasing inflation and are tightening monetary policy to do so.

With borrowing costs still at historic lows, the government could and should borrow to invest in infrastructure and innovation and to nurture growth. With the budget this month, you would expect the chancellor to take this approach.

3rd November 2017

By Izzy Werffeli

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