For the first time in more than ten years the Bank of England has raised interest rates.
The official bank rate has been lifted from 0.25% to 0.5%, the first increase since July 2007. The move reverses the cut in August of last year – made in the wake of the vote to leave the European Union.
The Monetary Policy Committee justified the rate increase by saying that falling unemployment means there is “limited” slack in the economy. They believe that growth cannot accelerate much more without causing prices to rise more quickly. Seven out of the nine members voted in favour of higher rates.
However, the MPC repeated previous guidance that future increases in rates would be at “a gradual pace and to a limited extent”. Market observers are indicating two more interest rate increases over the next three years, taking the official rate to 1%.
The Chambers has reacted to the decision with the following comment:
“The rise was being predicted by many observers and so does not come as a shock. However, as the first rise in 10 years, it does put a marker in the sand and we need to make note of the action. With seven of the nine MPC members voting for the increase, that’s also quite a clear message. Our message back to the committee would be to stress the importance of taking things steady and monitoring reactions and outcomes carefully. While the Brexit-related constraints on investment and labour supply referred to by the committee are real, there is still plenty to be positive about within our local business community. Our last survey results showed that confidence is still strong, with many firms looking for new markets and opportunities, and not simply waiting to see what happens with Brexit negotiations. With the Bank of England’s latest forecasts of sluggish growth for the next few years, the government must use the upcoming Autumn Budget to boost business confidence and investment, and reduce the pressure on prices from policy decisions such as the forthcoming hike in business rates.”