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MPC votes for increase

Pound falls as Bank hints at ‘one and done’ rate rise

Mark Carney

Mark Carney: Bank governor warned of rate rise

The pound slipped today after Bank of England governor Mark Carney indicated that today’s interest rate rise from 0.25% to 0.5% may be followed by only gradual, or no further increases.

The nine rate-setters on the monetary policy committee voted 7-2 to increase its benchmark rate. Deputy governors Jon Cunliffe and Dave Ramsden were the two who voted for no change, believing wage growth is too weak to justify a rise.

The rate was last raised in July 2007 and was cut in August 2016 in the midst of market turmoil following the Brexit vote in June.

The FTSE 100 rose while the pound fell by about 1% as markets reacted to Mr Carney’s comments that gave no hint of further rate rises.

David Lamb, head of dealing at Fexco Corporate Payments, bluntly said:Mark Carney’s prolonged campaign of hints had built market expectations up to such an extent that anything less than a full-blown hawkfest would be a disappointment – and so it proved.

“So despite the 10-year wait, the Bank of England’s dovish interest rate rise has proved an anti-climax for the pound.

“Mark Carney’s press conference talked of any future rises being ‘gradual and limited’, but the markets’ conclusion has been more blunt – ‘one and done’.

“So the net effect has been to deliver a beating for the pound, which is now losing the gains made as it soared on the pre-hike hype.

Mr Carney justified today’s increase by saying it was time to start to tighten policy, despite the British economy’s sluggish performance this year.

In a statement the Bank said: “The MPC now judges it appropriate to tighten modestly the stance of monetary policy in order to return inflation sustainably to target.

“All members agree that any future increases in Bank Rate will be at a gradual pace and to a limited extent.”

Analysts and commentators were divided on the merits of a rise and what it will achieve.

David Blanchflower, a former member of the MPC and now economics professor at Dartmouth college in the US, said he saw “nothing” in the recent economic data to justify higher interest rates.

Dame DeAnne Julius, also a former MPC member and chair of University College London, is “absolutely” in favour of a rate rise, given the relative strength of the economy.

UK growth at 0.4% is stronger than the 0.3% expansion expected by the Bank.  Inflation at 3% is at a five-year high and also above the Bank’s estimate of 2.8%. UK unemployment has fallen to a four-decade low of 4.3%.

The Bank said it now expected Britain’s economy would grow by 1.6% next year and by 1.7% in 2019, unchanged from its forecast made in August and in line with a new, slower, sustainable rate.

Jeremy Lawson, chief economist to Aberdeen Standard Investments said: “Because the rate increase is already priced in, markets will be mainly focused on the communication accompanying the move and what it means for future policy.

Jacob Deppe, head of trading at online trading platform Infinox said:Given the amount of column inches generated by Bank of England governor Mark Carney’s warning to expect an interest rate hike sooner rather than later, he would have looked very foolish if the Monetary Policy Committee (MPC) had stayed its hand today. 

“The Bank’s Governor may feel he painted himself into a corner having raised market expectations of a rate hike to near fever pitch levels over a matter of several weeks.

“Even if the economic data didn’t support an interest rate rise, it’s likely that having built up such a head of steam Mr Carney would have felt he had no choice but to act.

“While it is largely a symbolic rise, a move upwards of 25 basis points does at least send a signal that the ultra-low interest rate party is over.”

Nancy Curtin, chief investment officer of Close Brothers Asset Management, said: “This should be seen as a largely symbolic move, rather than the start of a concerted programme of tightening.

“Carney is clearly trying to walk a fine line between being seen to tackle inflation and consumer debt issues, and not undermining the country’s growth. It would be a shock to investors to see further monetary policy changes in the short-term.

“In truth, the timing of this rate rise now seems mistimed. While inflation is seen as a key risk, the economy is fairly fragile. Retail figures and construction data have both taken significant hits in the last month, suggesting growth is slowing in the face of Brexit-related uncertainty.

“Yes, GDP increased by 0.4% last quarter, but the UK has fallen from highest growth rate in the G7 to the lowest.”

Property for sale

Most homeowner are now on a fixed rate mortgage

Higher interest rates will hit Britain’s 3.7 million households which are on a standard variable rate (SVR) or tracker mortgage.

However, since the last rate rise more homeowners have opted for fixed rate mortgages. The total share of new mortgages taken out on a fixed rate was just under 88% in the second quarter of 2017, according to the Bank of England. This compares with 46% at the beginning of 2008.

A rate rise will be a welcome relief to the 45 million savers who are likely to enjoy higher returns from accounts that pay variable interest rates.

Even so Calum Bennie, Scottish Friendly’s savings specialist, said: “If commerce and consumers don’t play ball and carry on lending and borrowing excessively, the danger is rates may rise again, this time inflicting real financial pain.  While savers are likely to see savings rates increase, cash accounts will continue to lose money as any gains are eaten up by inflation. We aren’t out of the woods yet.”

Richard Theo, CEO of online investment firm Wealthify, said: “Today’s long-awaited rate rise may seem like welcome news for UK savers, but it will be a double-edged sword for many Brits, giving slightly better cash savings returns with one hand, then taking them away in the form of higher debt repayments, with the other.”

David Marshall, operations director with Warners Solicitors & Estate Agents, said: “A small rise like this will not have a notable impact on the property market.

“Interest rates are still very low compared to historical norms and demand for properties in the local market has consistently outstripped supply over the last two years and we expect buyer activity to remain high into 2018.”

James Roberts, chief economist at property agent Knight Frank, said: “An increase in the base rate is often viewed with trepidation by the property industry, but this long expected move is unlikely to have a negative impact. I expect the Bank of England will follow the same strategy as the US Fed, and gently apply the brakes while giving lots of advance warning, in order to balance the competing pressures of normalising rates while not derailing growth. 

“For commercial property, it should be remembered that debt has played far less of a role in the market in recent years than was the case prior to the financial crisis. Commercial property yields are not strongly correlated to interest rates, so I do not see a small rate increase having much of an impact.”

TUC General Secretary Frances O’Grady said: “This is the last thing hard-pressed families need. With living standards falling, the economy needs boosting not reining in.

“Today’s hike is a hammer blow for those in problem debt, whose repayments will now rise.

“The Bank of England has made the wrong call – but the government must not hide behind it.

“Working people are paying the price for ministers’ failure to get wages rising. And for their failure to invest in jobs and services when interest rates were so low.”

Other data on the economy published today:

  • The Purchasing Managers Index (PMI) points to the construction sector seeing a slight pick-up in activity in October but still finding life very challenging. EY says the survey does little to inspire confidence that the sector is set for marked improvement in Q4 after output contracted in both previous quarters.
  • House building activity could be pressurised by extended lacklustre housing market activity and subdued prices amid weakened consumer fundamentals.

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