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First interest rate rise in over a decade

Interest Rates

The Bank of England’s Monetary Policy Committee (MPC) met yesterday and voted by a majority of 7-2 to increase the Bank Rate for the first time in over a decade. The rate will be increasing by 0.25 percentage points, to 0.5%.  The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. 

The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.

The MPC’s outlook for inflation and activity in the November Inflation Report is broadly similar to its projections in August.  In the MPC’s central forecast, conditioned on the gently rising path of Bank Rate implied by current market yields, GDP grows modestly over the next few years at a pace just above its reduced rate of potential.

Consumption growth remains sluggish in the near term before rising, in line with household incomes.  Net trade is bolstered by the strong global expansion and the past depreciation of sterling.  Business investment is being affected by uncertainties around Brexit, but it continues to grow at a moderate pace, supported by strong global demand, high rates of profitability, the low cost of capital and limited spare capacity.  CPI inflation rose to 3.0% in September.

The MPC still expects inflation to peak above 3.0% in October, as the past depreciation of sterling and recent increases in energy prices continue to pass through to consumer prices.  The effects of rising import prices on inflation diminish over the next few years, and domestic inflationary pressures gradually pick up as spare capacity is absorbed and wage growth recovers.

On balance, inflation is expected to fall back over the next year and, conditioned on the gently rising path of Bank Rate implied by current market yields, to approach the 2% target by the end of the forecast period.   As in previous Reports, the MPC’s projections are conditioned on the average of a range of possible outcomes for the United Kingdom’s eventual trading relationship with the European Union.  The projections also assume that, in the interim, households and companies base their decisions on the expectation of a smooth adjustment to that new trading relationship.

Source: Insight DIY Team & Bank of England press release

Image - courtesy of Shutterstock

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02 November 2017

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