Bank of England Lifts Cash Rate

From the UK Office For National Statistics.

Concerns about “inflation over target” and “limited” slack in the economy have prompted the Bank of England to raise interest rates for the first time in more than a decade.

On 2 November 2017, the Bank’s Monetary Policy Committee (MPC) voted 7-2 in favour of raising the interest rate to 0.5%, from a record low of 0.25%.

The majority of the MPC agreed that now was the right time to raise interest rates “to return inflation sustainably to the target”.

But the Committee acknowledged that “uncertainties associated with Brexit are weighing on domestic activity”. Some economists, including former MPC member David Blanchflower, had warned against an interest rate rise.

After rising to 5.75% in July 2007, the Bank of England base rate was subsequently cut nine times in the next two years as the financial crisis took effect.

It reached a record low of 0.5% in March 2009 and remained at that level, partly because of the long-lasting impact of the crisis, before dropping again to 0.25% in August 2016.

What’s changed since the last interest rate rise?

The last time we saw a rise in the interest rate was 5 July 2007. To put that into context, Tony Blair had recently resigned as Prime Minister and the first iPhone had just been released.

On that day, the Bank voted for a higher interest rate against a backdrop of a “strong global economy”. The rate had risen twice that year already and there was little sign of the impending financial crisis.

But between the last interest rate rise and today, the MPC had met 118 times and decided against raising interest rates on every occasion.

When setting interest rates, the MPC considers many factors including debt, savings, inflation, economic growth, employment and wages. They’ll also look at conditions in economies and financial markets worldwide.

Consumer credit rose by 4.6% compared with the previous year in May 2007, less than half as fast as September 2017 (9.9%). People are increasingly borrowing to finance their purchase of a new car. The Bank estimates that growth of dealership car finance accounts for three-quarters of growth in the total stock of consumer credit since 2012.

Raising the interest rate is expected to increase the size of repayments on loans, and could therefore lead to a reduction in the amount of borrowing.

Households saved 5.4% of their disposable income in April to June this year, compared with 8.8% in the first three months of 2007.
The interest rate dictates your earnings on money saved. Savers, who outnumber borrowers, could get a higher return thanks to today’s rise.

The economy took much longer to recover from this recession compared with previous ones, which kept interest rates low

Previous recessions, number of quarters taken for GDP to reach pre-recession level

But the general downward trend in interest rates goes back further than the last decade. Less than 30 years ago, the base rate was close to 15%.

The interest rate has fallen substantially in the last 30 years

Bank of England base rate, 1975 to 2017

Despite today’s rise, we’re unlikely to see a substantial reversal to that trend – Mr Carney has said that any increases to the rate will be “gradual” and “limited”.

Author: Martin North

Martin North is the Principal of Digital Finance Analytics

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