The Bank of England holds rates but strongly hints pace of rises could accelerate
Bank of England policymakers have today voted unanimously to keep interest rates on hold at 0.5 per cent but warned rates would need to rise “earlier” and by a “somewhat greater extent” than projected at their last review in November, if the economy remains on its current track.
In November the Bank raised the cost of borrowing for the first time in more than 10 years - from 0.25 per cent to 0.5 per cent.
Its forecasts at the time indicated there could be two more increases of 0.25 per cent over three years.
But it now appears there could be a third increase and those rises could be sooner than expected.
“The Committee judges that… monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November report,” minutes from the Monetary Policy Committee’s (MPC) meeting said.
Reacting to the bank’s decision, RBS Chief Economist Stephen Boyle’s said: “The Bank reckons that the current pace of growth in the UK is of around 1.75 per cent a year will be maintained until 2020. That’s pretty modest. Equally modest, however, will be the speed at which the economy is able to grow. That means bringing inflation back to the 2 per cent target will be long-delayed unless rates rise sooner and by more than 0.75 percentage points over those three years.”
Nick Dixon, investment director at Edinburgh-based life and insurance firm Aegon UK, said: “This week’s stock market turmoil originated from speculation that interest rates will rise quicker and steeper than expected, with follow through impacts into equity values and markets outside the US. Since the June 2016 Brexit vote, we have held a firm view that sterling weakness and inflationary pressure would force a faster pace of rate increases than the market had priced in. This week’s volatility is a timely reset of market expectations.
“Today’s decision to keep rates at 0.5 per cent is temporary in our view. Fundamentals in the UK, along with pressure from the US, point towards a tightening ratecycle in the UK which will gather pace in the second half of 2018.”