Bank of England announces base rate rise to 0.5%

03 November 2017

The Bank of England yesterday announced a rise in the base rate from 0.25% to 0.5%. Amid mounting speculation this would happen, it means the Bank has reversed the rate cut of August 2016 which was brought in to help Britain’s economy in the aftermath of the Brexit vote.

In a summary on their website, the Bank’s Monetary Policy Committee (MPC) has stated:  

“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,” 

The decision could not have been made lightly. Britain has been experiencing weak annual growth for 4 years now, but with inflation running at a 5 year high of 3% in September and unemployment at a 42 year low, the central bank was concerned that the economy would overheat. 

However a recent poll run by Reuters found that the majority of economists participating in the poll said a rate hike would be a mistake. They did accept however that a rate rise to 0.5% would not derail the economy, but ‘further increases might be damaging’.

Brendan Sharkey, head of MHA MacIntyre Hudson’s Construction and Real Estate sector commented on the announcement saying:

“This is not a surprise given the early warnings that have been sign posted; albeit unwelcome. 

“Our experience is that lending to the property market both for development and investment is very competitive with Challenger banks coming into the market all the time. They have varying criteria and risk profiles which makes shopping around very beneficial. The traditional banking fraternity have for some time been revising their exposure to the property sector improving their risk profile and to some degree margins. Consequently there is likely to be little change. Property developers may see this as a sign that the market is going to change in terms of demand and estate agents may see price reduction in the second hand market.

“As regards the mortgage market the number of long term deals has been in decline and the rates had begun to go up. Those that locked into the historically low rates should now feel vindicated.
“There will be concern as to affordability for those that have long term low interest deals who may see the their repayments go up at a time when inflation is exceeding  wage increases. The question for the , and many others, is when is the next rate increase coming and speculation on this is probably the issue of the day.”

Of the Retail sector, MHA MacIntyre Hudson’s sector head Alison Conley has said:

“With retail spending down and the CBI warning that high street sales are falling at their fastest rate since the height of the recession in 2009, a rise in interest rates can only put further pressure on the retail sector. Fragile consumer confidence in the crucial pre Christmas spending period is likely to give retailers a severe case of the winter blues.”

Travel & Tourism sector head, Rajeev Shaunak commented:

"With regard to the travel sector the biggest impact on demand for travel and holidays is actually the ‘feel good factor’ (or overall consumer confidence) and the level of disposable income. Therefore lower interest rates have had a positive impact especially for those in steady employment and with existing mortgages who have been paying considerably less in mortgage payments than in the past.   

“A significant increase in rates may have the ‘double whammy’ of reducing disposable income (and therefore demand for holidays) and at the same time further stagnating the housing market (the value of your home together with job security being two very important factors in the ‘feel good factor’).“

Chris Sutton, head of MHA MacIntyre Hudson’s Leisure & Hospitality sector observed:

“The area that I think will be affected most is restaurants which are heavily borrowed. Based on recent press they are already working off thin margins and the major chains/brands have been closing units. So this whilst expected and well predicted will all the same not be a welcome development for restaurateurs.”

For the 43% of homeowners on variable or tracker mortgages, today’s news will be unwelcome. According to Nationwide Building Society, a 0.25% rise in base rates on a £250,000 mortgage would result in a £369 annual increase in mortgage costs based on a 20 year mortgage.

It is implied that the news will be good for savers. However, with the base rates being so low for a prolonged period of time, banks and building societies have been able to borrow cheaply from the bank of England, therefore not needing to compete for deposits from savers. 

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