Bank of England hints at earlier and faster rate rises

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By Ben Morris

The Bank of England has indicated that the pace of interest rate increases could accelerate if the economy remains on its current track.

Bank policymakers voted unanimously to keep interest rates on hold at 0.5percent at their latest meeting.

However, they said rates would need to rise “earlier” and by a “somewhat greater extent” than they thought at their last review in November.

Economists think the next rate rise could come as soon as May.

Higher interest rates have an important effect on households and the economy.

Around 8.1 million UK households have a mortgage, and of those almost half are on either a standard variable rate or a tracker rate.

Interest rates on those types of mortgages would be likely to match any increase in official rates made by the Bank of England.

But for savers a move higher by the Bank of England could be a bonus, as High Street banks generally have to raise their rates of interest.

Tightening times

In November, the Bank raised the cost of borrowing for the first time in more than 10 years – from 0.25 percent to 0.5 percent.

Its forecasts at the time indicated there could be two more increases of 0.25 percent over three years.

But it now appears there could be a third increase and those rises could be sooner than expected.

“The Committee judges that… monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November report,” minutes from the Monetary Policy Committee’s (MPC) meeting said.

The Bank noted that the global economy was expanding at the fastest pace in seven years and that the UK was benefiting from that growth.

It also thinks that UK wage growth will start to pick-up, giving the economy a further boost.

As a result, the Bank has raised its growth forecast for the UK economy to 1.7 percent this year, from its previous forecast of 1.5 percent  made in November.

But it says its forecasts are based on a “smooth” adjustment to Britain’s departure from the European Union.

Perkier economy

Official figures last month showed that the economy grew 0.5 percent  in the last three months of 2017, which was faster than economists had been expecting.

Unemployment remains low at 4.3 percent  and inflation edged lower in December to 3 percent.

The Bank also released the letter sent by governor Mark Carney to the Chancellor of the Exchequer, Philip Hammond, to explain why inflation had breached the target rate of 3 percent  in November.

In the letter, Mr Carney said that higher inflation was “almost entirely” due to the effects of a rise in the prices of imports, caused by the fall in the pound’s value after Britain voted to leave the European Union.

The chancellor replied by stressing the importance of boosting UK productivity and the government’s efforts to make that happen.

 

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