The Rate Rise Debate

Posted By Adam Smith on 13th April, 2018

Judging by the reaction to this month’s Monetary Policy Committee (MPC) meeting at the Bank of England, you would be forgiven for thinking that a Bank Base Rate (BBR) rise at the next meeting in May is a foregone conclusion. The decision to hold rates at their 0.5% level – voted through by seven to two – has been viewed as merely an aperitif to the main course which will be delivered in just over a month’s time, when the Bank is expected to serve up, at the very least, a rise up to 0.75%. 

Given the most recent inflation figures – a monthly drop between January and February of 0.3%, taking it down to 2.7% – it might well have been expected that MPC members would (on the whole) want to keep their powder dry for at least another month or so, in determining whether a rise was necessary. The fact that two members, Ian McCafferty and Michael Saunders, were not even willing to wait that long, perhaps tells its own story in terms of which way the wind is blowing. But, I hear you say, isn’t the Bank’s target for inflation 2%? And isn’t that move downwards a suggestion that further rate rises might not be necessary in terms of pushing it down further. After all, the move up to 0.5% in November could have been construed as having done the job, especially when you consider that the Bank also believes the post-Brexit rise in inflation has now, to a very large extent, blown itself out. There is, however, an underlying belief that those within the Bank of England – and recent public pronouncements from the Governor and other employees suggest this – are wanting to rise rates further in order to curb potentially large-scale inflationary pressures, such as wage inflation. Many have pointed out that unemployment – currently at a rate of 4.4% – is low, and you would have to go back to the 1970s to see it at similar levels, which is why there is the potential for significant pressure on wages which could increase considerably. Given this future, it might well want to argue further for interest rate increases now in order to curb this, which would certainly chime with the more forceful messages coming out of Threadneedle Street which appear to look far more in the direction of frequent, smaller rises. In that regard, the markets appear to be betting on a 25 basis points increase in May, with another potentially following before the end of 2018. We may even see two more during this calendar year, followed by a similar pattern in the years ahead, before we get up to that ‘new normal’ BBR of between 2-3%.

In view of the seemingly imminent base rate movement you should definitely speak to a Start broker today to review your mortgage arrangements. There is still time to secure some very competitive rates before any rises take effect.

Your home may be repossessed if you do not keep up repayments on your mortgage.

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