Bank Hikes Rates To 0.5% In First Rise For Over A Decade

The Bank of England has hiked interest rates to 0.5% in the first rise for over a decade and signalled more increases are on the way as it looks to cool surging inflation.

Policymakers on the Bank’s nine-strong Monetary Policy Committee (MPC) voted 7-2 in favour of the quarter point rise, which marks the first rates increase since July 2007.

The move comes as the Bank looks to dampen Brexit-fuelled inflation, which it predicts will now peak at around 3.2% this autumn.

UK interest rate chart. See story ECONOMY Rate. Editable versions of this graphic are available via PA Graphics or your account manager. Infographic from PA Graphics

The Bank’s quarterly inflation report also suggested two more rate hikes are likely over the next three years to return inflation back to its 2% target, which could see rates hit 1% by the end of 2020.

The milestone rate hike comes as the Bank cut its forecast for growth to 1.6% for 2017 from the 1.7% previously predicted, but held forecasts at 1.6% for 2018 and 1.7% for 2019.

Millions of borrowers on variable rate deals will be impacted by the rates decision, which will add around £15 a month to the cost of the average mortgage, while it will offer some relief to savers hit by surging inflation and negligible returns.

But a quarter point rise will only reverse the emergency cut seen in the aftermath of the Brexit vote shock in 2016 as the Bank sought to head off turmoil in the economy.

And the Bank said the impact on mortgage borrowers would be modest and gradual, with around 60% on fixed rate deals.

Sterling plunged over 1% against both the dollar and the euro to 1.31 US dollars and 1.12 euro respectively as financial markets were left unconvinced about further rate rises.

In minutes of the MPC meeting, the Bank said that debt costs would remain “historically very low” despite the quarter point rise.

It stressed that monetary policy would “continue to provide significant support to jobs and activity”, and any further rate rises would be “at a gradual pace and to a limited extent”.

Experts estimate that eight million Britons have never seen interest rates rise in their adult lives, with borrowing costs having languished at rock-bottom lows since the financial crisis.

How a 0.25% rate increase could affect your mortgage. See story ECONOMY Rate. Editable versions of this graphic are available via PA Graphics or your account manager. Infographic from PA Graphics

There are fears over the timing of the cut, given the uncertainty amid Brexit negotiations and as Britons are being squeezed by paltry wage growth and sharply rising inflation.

The Bank said the majority of policymakers who voted for the rise felt they could no longer tolerate above-target inflation despite Brexit uncertainty, with signs that other pressures were also building.

Oil prices in particular have risen sharply in recent months.

But for the two MPC members who voted to hold rates at 0.25%, Sir Jon Cunliffe and Sir Dave Ramsden, there were doubts over these domestic inflation pressures and fears over muted wage growth.

In the Bank’s latest set of forecasts, it said the economy would continue to expand “modestly” over the next few years, with growth of 1.7% pencilled in for 2020.

The economy has performed better than feared since the EU referendum despite the pound’s plunge, with growth edging up to 0.4% in the third quarter from 0.3% in the previous three months, according to last week’s official figures.

But the Bank warned over “considerable risks” to the outlook ahead of Brexit, while its own forecasts are based on a smooth transition period to the UK’s withdrawal from the EU.

It said the Brexit vote was already having a “noticeable impact” on the economy, but that growth was being supported by “resilient” consumer confidence, a robust global economy and its emergency rate cut from last August.