The Bank of England has raised the interest rates by 0.25 percentage points to 0.5 percent – the first rate increase since 2007.
Millions of mortgage borrowers experience an increase in their monthly repayments after the Bank’s Monetary Policy Committee (MPC)’s decision. However, savers should observe a boost.
The increase in the Bank rate was generally expected. However, it marks a watershed moment after several years of rock-bottom borrowing costs.
Mark Carney, the Bank’s Governor, said that with unemployment at a 42-year low and inflation that is above its 2 percent target, it was due time “to ease our foot off the accelerator” of stimulus which has long been supporting the economy.
Royal Bank of Scotland – which includes NatWest and Ulster Bank North – and TSB were some of the first to confirm that the hike was being passed on to a number of customers.
The Bank of England also suggested that it might increase rates further in the coming years.
However, currency markets were not impressed by the said announcement, sending the pound over a cent lower against the dollar to about $1.31.
That was after the movement of future increases that was implied by the forecasts of the Bank was lower than what some economists were expecting.
They suggested rates hitting 1 percent by 2020, with an increase of a quarter percentage point likely in 2018.
Economists perceived this as “dovish” in tone.
The chief economic advisor to EY ITEM Club, Howard Archer, stated: “We do not expect the MPC to act again until at least the fourth quarter of 2018.”
Shares in UK-based banks Lloyds and RBS – which regularly benefit from higher interest rates – decreased by almost 2 percent.
The MPC was divided on the decision on Thursday, with seven members which include governor Mark Carney voting for the said increase and two – Sir Dave Ramsden and Sir Jon Cunliffe- voting to keep rates on hold.
Experts calculate that eight million Britons have never experienced an interest rate rise.
In 2009, The Bank of England slashed interest rates to a historically low 0.5% to attempt to help nurse the nation’s economy back to health at the peak of the global financial crisis.
They have then reduced again to 0.25% last summer in the aftermath of the Brexit vote.
The decision to increase comes in the face of weak growth and warnings from various experts that it should be postponed to avoid risking the economy further.
The change in Bank rate is possible to be reflected in immediate increases in floating rate mortgages and by more continuous changes in other rates, including savings and unsecured borrowing rates.
UK Finance, the trade body for the lenders of Britain, says that there were 9.2 million mortgage loans that are outstanding in June 2017.
Of these number, 3.7 million were on a variable rate – including tracker mortgages that are directly linked to the Bank rate as well as those on standard variable rates that are set by individual banks and building societies.
However, the immediate impact of the said rate hike will be less extensive than it would have been during the past years as a growing number – presently 4.4 million – were on fixed-rate deals.
The Bank of England stated that it expected inflation which is already at a five-year high of 3 percent, to top at 3.2% in the coming month and for economic growth to continue to be subdued in the coming years.
Carney warned that Brexit was at the heart of weaknesses in the economy – increasing inflation through the reduction in the pound since the June 2016 referendum and impeding growth just as expansion elsewhere in the world is accelerating.
Carney also argued that the effect of Brexit on the supply of workers, and investment, implied that the “speed limit” at which the country’s economy can develop without driving inflation up had decreased.
The Bank insignificantly cut back its forecast for GDP growth for 2017 from 1.7 percent to 1.6 percent and left the outlook for 2018 and 2019 unchanged at 1.6 percent and 1.7 percent.