Bank of England Base Rate Holds Steady at 0.5%

UK interest rates are being held at 0.5% due to the Bank of England’s Monetary Policy Committee (MPC) voting by a majority of 6-3. 

Last year, bank rates were increased to 0.5%, representing the first uplift since 2007. The rise was justified by the Monetary Policy Committee (MPC) by pointing to stronger economic growth and low levels of unemployment.   

In the MPC’s minutes from the latest meeting, members agreed the first quarter’s drop in output growth would be brief and would gradually pick up in the second quarter.  

Members of the committee including Andy Haldane, Michael Saunders and Ian McCafferty disagreed with the decision and wanted an immediate rate rise. 

It was also noted from The Committee that employment growth remained solid and business activity had been steady, pointing to Q2 growth in line with MPC’s May forecasts. 

The Consumer Price Index in April and May stayed the same at 2.4% but was expected to increase slightly more than projected in May, reflecting higher dollar oil prices and a weaker sterling exchange rate. 

The MPC said its “best collective judgement remains that, were the economy to develop broadly in line with the May Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target”. 

The majority of the members decided that interest rates should not be increased at this meeting and everyone agreed that future increases will rise at a slow pace on a gradual basis.

Vikki Jefferies, proposition director at PRIMIS and PTFS, commented about the MPC’s decison: “Speculation around a Base Rate increase has dominated financial pages since the start of the year. The majority of commentators agree – a rate rise is not an if, but a when. While uncertainty remains around timescales, brokers need to start seeing this as an opportunity to re-engage with their back-books.
“Demand for remortgages is already strong – as the latest UK Finance figures showed – and now is the prime time for brokers to further drive these conversations with the numerous borrowers who are approaching the end of their fixed rate, or who have already reverted to their lender’s SVR.” 

Nick Dixon, investment director at Aegon, furthermore added: “With global trade concerns, continued Brexit uncertainty and subdued domestic activity, today’s MPC decision to hold rates is unsurprising. 

“Looking further out, two factors will be critical for inflation and hence interest rates. First the quality of Brexit especially the eventual trade deal will impact the level of sterling and hence inflation. Second is the labour market and whether wage pressures become embedded and create ‘cost push’ inflation. If sterling continues to depreciate and wage increases lead to higher prices, there will be pressure for interest rates to rise higher and faster than markets currently expect.” 

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