2 Nov 2017

Today’s interest rate rise: small but significant

It would have been more of a surprise today had the Bank of England NOT raised interest rates.

Having made it clear on several recent occasions that rising inflation meant a rate hike was imminent, Mark Carney would have earned his moniker as the “unreliable boyfriend” had nothing actually happened.

But something very important did happen. For the first time in a decade the Bank raised rates. Yes, by just a small amount, but it is nonetheless significant.

A line has been drawn under the era of easy money post the financial crisis. Britain has entered a new dawn. The only problem is, 10 years on, there are still serious questions about whether or not the economy is robust enough to cope.

Growth is weak by historic standards, wages are falling in real terms and even the Bank itself admits the full effects of inflation are yet to be felt on the high street. In other words households are feeling the squeeze and will continue to do so for the foreseeable future.

But the Bank says it can no longer “look through” rising inflation and it must therefore act.

Of course the biggest impact of today’s rise in rates will be felt by the millions of households up and down the country with a mortgage. Indeed the Bank says there are 2 million such households in Britain which have never seen a rate hike ever.

But to put it in context, the rise to 0.5 per cent today does only bring us back to the level we were at last June when the Bank pushed through an emergency rate cut after the referendum vote. But it’s also pencilled in two other increases – bringing rates to 1 per cent – in the next 3 years.

That’s good news for the economy, Mr Carney says, because of all the variables out there impacting growth and living standards at least one of them – inflation – will be brought under control.

All sounds fine on paper but there’s one huge wild card that could upset the plans – Brexit.

The Bank says its forecasts are based on a “smooth adjustment” to a new trading relationship with Europe. However, there’s by no means any guarantee that will happen. In fact, if Mr Barnier and his colleagues are to be believed, the chances of a smooth adjustment seem to be very remote indeed.

That being the case, Mr Carney admits the Bank will need to adjust its forecasts. Which is central banker speak for – while I’m raising rates today, I may yet lower them again if things don’t quite turn out as planned.

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