The Bank of England has increased interest rates to their highest level for nearly 10 years after the summer heatwave helped the economy bounce back from a snow-hit start to the year.
Members of the nine-strong Monetary Policy Committee (MPC) voted unanimously to raise the base rate from 0.5% to 0.75%.
The move sees rates rise above the emergency low of 0.5% for the first time since March 2009 and marks only the second hike since the financial crisis, after last November’s quarter-point increase.
Minutes of the Bank’s rate meeting signalled there would also be further rises to come as policymakers look to bring inflation back to target, although they continued to stress that these would be “gradual” and “limited”.
Millions of borrowers on variable rate mortgages will be affected by the decision, with a quarter-point rise adding around £16 a month or £192 a year to the average mortgage.
But it will offer some relief to savers, who have seen their nest eggs decimated by above-target inflation and negligible returns.
The Bank had backed away from a rate rise earlier this year after growth slowed down sharply to 0.2% in the first quarter, but said the economy had recovered as predicted.
It forecasts that growth rebounded to 0.4% in the second quarter, with data pointing to a similar rate of growth between July and September.
In the minutes of the MPC’s meeting, the Bank said: “Recent data appeared to confirm that the dip in UK output in the first quarter had been temporary, with momentum recovering in the second quarter.”
The pound made gains versus the euro following the rate increase up by nearly 0.3% at 1.128, but was still trading lower by around 0.1% against the US dollar at 1.311.
In its accompanying quarterly inflation report, the Bank kept its forecast for growth this year unchanged at 1.4%, but increased the outlook for 2019 to 1.8% from the 1.7% previously predicted.
It continued to pencil in growth of 1.7% for 2020.
The report showed its predictions are based on financial market expectations for rates to rise to 1.1% by mid-2021, which would suggest two more quarter-point rises.
But it also said inflation – currently running at 2.4% – was set to rise slightly higher than it had predicted in May’s set of forecasts after recent falls in the value of the pound and higher energy prices.
The Bank confirmed in the minutes that an “ongoing tightening of monetary policy” would be needed to rein in inflation over the “more conventional” two-year horizon, if the economy grows in line with its forecasts.
Its rate hike comes as the squeeze on household finances has eased, with wage growth just outstripping inflation, which is helping growth to pick up.
The Bank said retail sales had surged by 2.1% in the second quarter, boosted by the recent sunny weather.
“Weather effects – both the snow-related disruption in February and March and the unseasonably warm weather and long sunshine hours in May and June – seemed to have accounted for around half of the second quarter rise,” it added.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules hereLast Updated:
Report this comment Cancel