Some expect the Bank of England to increase base rate to 0.75%

  • img Harvey Cawdron
  • POSTED ON 02 Aug 2018

Claims

On Thursday, the Bank of England is expected to increase interest rates for just the second time in the last decade. 

Economists and investors have predicted that the Monetary Policy Committee (MPC) will increase rates by 0.25%, from 0.5% to 0.75%. This will have an impact on tens of millions of savings accounts, loans and mortgages, as banks use them as a reference point for the amount they charge borrowers and give to savers. 

If such an increase occurred, it would follow a similar change in November 2017, when rates increased from 0.25%, a record low. It would also take the Bank Rate to its highest level since 2009. 

Investors are betting that there is a 90% chance of the rise, and many economists expected it to occur earlier. 

But, weak economic data, partly a result of the Beast from the East's low temperatures in winter, have seen bank rates remain still this year. 

Britain's economy only expanded by 0.2% in the first 3 months of the year. Bank staff see this as a temporary weakness and believe it will expand by 0.4% in the second quarter. 

In June, 3 out of 9 policymakers voted to increase rates to 0.75%, and among them was Andy Haldane, the Bank's chief economist. 5 votes are required to implement the proposed alterations. 

While many analysts think there will be another split decision on Thursday, solid employment growth, steady payment growth and a rebound in customer spending are thought to be elements that will prompt an increase. 

Economists at Goldman Sachs expect the Bank of England governor, Mark Carney, to 'stress that the August hike is a slow and steady step on the MPC's path to normalisation'. 

Rates on mortgages and savings accounts should increase if the Bank Rate does. When interest rates were increased last November, it was thought that savers would reap the benefits of a rise more quickly than borrowers would experience the disadvantages. 

But it is more complex in reality. Sir David Ramsden, one of the Bank's deputy governors, told savers to 'never' expect banks and building societies to fully pass on rate rises. He claimed that the financial crisis had caused alterations in the returns that savers should expect. Despite low rates, he said that many savings accounts were offering higher returns than the Bank Rate. 

In recent years, cheaper mortgage deals have also prompted people to lock in promotional rates. The rate rise's impact will not immediately hit those on fixed-rate deals. The BBC report that according to the Financial Conduct Authority, in 2010 only 38% of people fixed their mortgage rates, a figure that has risen to 90% of new mortgages and 2 thirds of all home loans.

On Thursday, the Bank of England will also release its forecasts for economic growth, jobs and inflation. Although pay is starting to get ahead of price increases, wage growth is still modest by historical standards. 

Inflation, according to the consumer prices index (CPI), increased by 2.4% this year until June, lower than the 2.5% predicted by the Bank in their forecast 3 months ago. 

Unemployment is at 4.2% in the 3 months to May, slightly higher than the Bank's forecast of 4.1%. 

On Thursday, information about the level of the rate we should expect in normal times will be released by the Bank. Meaning, when inflation is steady at the 2% the Bank is aiming for and the economy is operating at its maximum speed limit. These times are abnormal. Despite the fact any increases in interest rates are expected to be 'limited and gradual', Carney said that 'guidance is not a promise of the future path of policy'. He added that the conclusive Brexit deal was 'potentially the most important' influencer of monetary policy in the next few months and years, and said that the Bank was prepared for any outcome.