In a widely expected move, the Bank of England’s Monetary Policy Committee (MPC) today raised rates for the first time since July 2007 from 0.25% to 0.5%.
Ben Yearsley, Director, Shore Financial Planning:
Today’s move had been heavily trailed by Governor Mark Carney, however there was still a degree of scepticism in markets as he was getting a reputation for crying wolf too often.
Whilst the UK economy has been under pressure in 2017, it is still growing and unemployment is at levels last seen in 1975. Although inflation is close to peaking, CPI at 3% and RPI at 3.9% is too high to leave unchecked. Indeed any further Brexit related shock could lead further pressure on sterling, with the knock-on impact of increasing the cost of imported goods and thus inflation. Whilst wage growth remains lacklustre, with little spare capacity in the economy many think this is only a matter of time before this too starts to pick up.
Some perspective is definitely needed around this rate rise as the UK economy performed perfectly well for 7 years until 2016 at today’s new rate. In my view, last year’s post Brexit vote cut was unnecessary and actually created more problems. Ultra low rates have kept moribund companies alive, stifled innovation, and had a massive knock on impact for pension deficits. Companies having to plug pension deficits, partially due to these low rates, has taken cash away from investment.
Today’s rate rise is unlikely to be the first of a series, though it does give the MPC some flexibility if any further stimulus is needed in the economy next year. It is now clear the UK is on a different rate path than the US with a further increase expected there in December and more into 2018.
Main beneficiaries from today’s increase include the banking sector which has the opportunity to increase net margins. However they will be under pressure to pass rate increases through to beleaguered savers as well as upping the cost for borrowers.
Shore Financial Planning