UK

Will Interest Rates Go Up Today? Here's 4 Things To Watch For

Expected but controversial.

02/11/2017 00:20 GMT | Updated 02/11/2017 10:14 GMT

The Bank of England will decide later today whether to raise interest rates for the first time in a decade.

The decision on the base rate, which affects thousands of mortgages and savings accounts, comes over 10 years after rates last went up in July 2007. 

Back then, they rose to 5.75% but today the rate stands at 0.25%, and market analysts have told HuffPost UK they expect a decision to boost rates by up to 0.5%, ending the historic low.

An increase would signal improved confidence in the economy. However, a shock decision to hold the rate could prompt turmoil.

Bank governor Mark Carney hinted at an increase in the summer, setting expectations ahead of Thursday’s decision.

PA Wire/PA Images
Governor of the Bank of England, Mark Carney, hinted at a rates rise over the summer

Here are four things to watch out for as the decision is made:

1. Whether or not the rates rise

The Bank’s Monetary Policy Committee (MPC) sets interest rates in an effort to meet an inflation target of around 2%, well above the five year high of 3% in consumer inflation reached in September.

The MPC has nine members and meets eight times a year, and most recently voted in August to keep rates at a record-low of 0.25%.

But its decision this time around is expected to recommend a modest increase of between 0.25% and 0.5%. 

That outcome has been factored into the value of Pounds Sterling and the broader market.

“The key thing will be whether or not they do move rates,” Robert Garder, Nationwide’s chief economist, told HuffPost. “We do think they are likely to raise rates tomorrow but don’t expect a massive impact on the economy.”

If rates rise

This will conform to the market’s expectations and crucially be a sign that the UK economy is recovering or at least is predicted to no longer need continued stimulus via record-low rates.

If rates stay the same

This will be a shock to the market, and potentially signal a lack of stability in the UK economy. The value of Sterling will likely fall as the impact of an increase has already been priced in by the market.

2. How much rates rise (if they do)

“The raise if it happens is likely to be fairly small so any effect is modest,” Gardner said. “The proportion of home owners on variable mortgages is at a record low.”

The number on those types of mortgages has fallen to a record low of c40%, down from a peak of c70% in 2001. It means most home owners are on “fixed rate” deals, protected in the short-term from changes in the base rate.

Jeremy Spain, fund manager at Charles Stanley, told HuffPost he expects a decision in favour of a rate rise, with an the increase of around 0.25%.

“An increase on that scale would be nothing in the grand scheme of things, and even for those who haven’t experienced a rise before, they will probably be on a fixed rate, and so the effect will be minimal,” he said. For average mortgages, the increase could be around £15 a month, he added.

3. Whether more increases are likely

The MPC will announce its decision in a statement and analysts will quickly pour over its words, looking for signals around future moves on rates.

“We’d expect the committee’s language to be moderate and for them to indicate the next rise won’t come until the end of 2018 or even early 2019,” Spain said.

Other analysts point towards pressures on the economy, such as stagnant wage growth, even shrinking real pay packets, and restrained purchasing power as tempering the Bank’s position.

“We expect the interest rate hike tomorrow is likely to be a one-off event,” IHS Markit’s Raj Badiani told HuffPost. “But [we] accept it will be a close call if one more follows in early 2018.”

“The central bank will wait to see how the economy responds after the interest rate hike tomorrow, while facing strong criticism for not tolerating the inflation overshoot given the economy is facing some extraordinary circumstances,” he added.

The National Institute of Economic and Social Research has predicted that any rise on Thursday would be the beginning of a slow run of increases, according to Bloomberg.

It cites increases in pay packets via the higher minimum wage and a potential ending of the public sector pay gap as reasons for the bank to continue hikes in the coming months and years.

4. What banks do with the new rate

The aftermath of any decision will take longer to assess, especially if it is a modest rise. 

There are no hard and fast rules as to how banks handle increases in base rates, although some have already said how they will respond.

Nationwide, the building society, confirmed it will pass on any increase to its millions of savings account holders.

“We have said we would move any increase to our savers,” Gardner said. “But it will be interesting to see how the industry as a whole handles any change.”

The Bank’s decision comes after the purchasing managers’ index for manufacturing beat economists’ forecasts on Wednesday, amid a boost in domestic factory orders.

Carney was warned earlier this week that any raise in the rate would hurt struggling homeowners.