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The Bank of England raises key interest rates - Views ( 17102 )

The Bank of England raises key interest rates

Author: EricBBigham , Last Modified, 2022-01-03

Category: finance Keywords: Bank-of-England-Raises-Key-Interest-Rate

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The Bank of England raises key interest rates

The Governor of the Bank of England MarK Carney (Chairman of the G20's Financial Stability Board) raised the Bank of England's key interest rate after an unprecedented period of almost a decade.

Carney who heads the powerful Monetary Policy Committee (MPC) including seven members of a possible nine, responsible for rate-setting, voted in favour of a one quarter percent (0.25%) increase, taking the rate to 0.5 per centage points. The market reacted decision was widely anticipated by economists and markets.

In a speech he gave an upbeat forecast for economic growth. Investors and analysts widely anticipated the rise and markets priced in a 90 percent possibility of a hike prior to the decision. The Banks forecast factored in positive GDP expansion, responding to a measured uptick in third quarter growth figures.

He did warn however that the rate of growth in 2018 is likely to be somewhat sedate at about 1.7 per cent. Spare capacity in the economy has eroded a little more rapidly than had been anticipated driving inflationary pressure which is expected to have peaked at 3.2 per cent in October, due to a depreciation of sterling following the EU referendum in June 2016 and more recent pick-ups in oil prices.

Rate-setters voted 7-2 in favor of hiking the benchmark rate to 0.5 percent from 0.25 percent.

Two members of the committee, Sir Jon Cunliffe and Sir Dave Ramsden, voted against raising rates, suggesting a weakness of wage growth still persists, and troubles Bank of England economists although headline inflation has surged in the year to September.

For major sections of the economy, real wage increases have not kept pace with price rises over the past decade, putting a squeeze on many consumers. The small rate hike announced today will add an average of GBP 180 extra per year to mortgage payments, and put a stop on real house price growth.

The Bank signalled further rate rises are likely to be at a gradual pace, and somewhat limited. But underlying forecast assumptions imply a possible two hikes by the third quarter of 2020.

We can assume the current economic growth globally will underpin the damaged UK economy however much of this will be a result of net trade and business investment rather than consumer spending with international investors taking advantage of the weak pound and dithering house prices to steal up UK property bargains.

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The 2008 Financial Crisis weakened UK productivity growth

since the global financial crisis a weak UK productivity has held back frontling growth. The economy was growing at a healthy rate the last time interest rates were raised by the Bank of England, on 5 July 2007.

It is despite a weaker productivity outlook that The Bank decided to increase the base interest rate today. Productivity growth forecasts productivity growth are at longer-term averages of 1.25 per cent to 1.5 per for 2020, the end of the Banks forecast period. It was around 2.25 per cent in the pre crisis era.

The MPC members had to tighten monetary policy to stop inflation from rising further even though growth is lower. It argues that lower productivity has essenially weakened the potential for strong economic growth.

Carney also commented on the Brexit-related constraints put on investment and the supply of skilled labour a reinforcing factor for a marked slowdown in the UK. The Brexit vote is impacting the economic outlook with uncertainties and leading to a drag on domestic activity. Monetary policy was left largely unchanged including the Banks positions in government gilts and corporate bonds.