August 02, 2018
Markets suggest a 91% chance of rates returning to levels unseen since March 2009
Bank of England poised to raise interest rates
The Bank of England is poised to raise interest rates above the level set since the aftermath of the financial crisis for the first time, despite a weakening outlook for the British economy and growing risks from Brexit.
Economists widely expect the Bank’s monetary policy committee (MPC) to lift the cost of borrowing above 0.5% on Thursday to reach 0.75%. Financial markets suggest a 91% chance of rates returning to levels unseen since March 2009, when Britain was in the grip of recession.
However, recent readings for the economy have painted a mixed picture for economic growth. Survey data on Wednesday showed factory output falling to the lowest levels for 16 months in July, amid fears over Brexit and trade wars.
On the eve of the interest-rate decision, the latest snapshot from IHS Markit and the Chartered Institute of Procurement and Supply showed weaker domestic activity for the manufacturing sector, which could suggest weaker growth lies ahead for the British economy.
However, inflation has remained stubbornly above the 2% target set for the Bank by the government, after having risen sharply straight after the EU referendum result.
Some rate setters on the MPC, including the Bank of England’s chief economist, Andy Haldane, also believe wage growth is just around the corner for workers, amid the lowest levels of unemployment since the mid 1970s, a factor that could help boost workers’ bargaining power for higher pay.
The summer heatwave, royal wedding and England progressing to the semi-final of the World Cup helped boost the economy, triggering stronger retail sales in April and May before they unexpectedly fell back in June. The Office for National Statistics found that the warmer weather helped the economy rebound from a slowdown earlier this year after heavy snowfall from the “beast from the east”.
Having watched the economy grind to a halt in the cold weather as building cranes and diggers fell idle across the country, the Bank delayed raising interest rates in May above 0.5%, preferring to wait for better news.
Keeping them on hold again could test the Bank’s credibility after a series of speeches from MPC members suggesting that higher interest rates would be required if economic growth continued to recover.
Despite some stronger readings for the economy, some economists have warned the Bank against raising rates amid increasing uncertainty over Brexit, as Theresa May is faced with widening parliamentary divisions over her plans.
Writing in the Guardian last month, David Blanchflower, a former MPC member , said there was no basis for the MPC to raise rates amid the uncertainty.
Threadneedle Street has previously warned that lower interest rates could be required if the UK left the EU without a deal.
Mark Carney, the Bank’s governor, has said Brexit developments would have a significant influence on monetary policy. While the MPC has a mandate to steer inflation towards 2%, it also has the ability to deviate from this course to support the economy through difficult periods.
Some economists have argued the unemployment rate of 4.2% masks the precarious nature of work for many people, which could hold back wage growth as workers’ bargaining power remains subdued. The most recent official figures show wage growth dropped to the lowest level in six months in the three months to May.
While higher interest rates would add to financial pressure facing consumers, there are fewer people than in previous years who would immediately feel the difference from higher borrowing costs.
Nationwide said the share of outstanding mortgages on variable interest rates – which would lead to an increase in payments – has fallen to its lowest level on record, at around 35%, down from a peak of 70% in 2001.
Robert Gardner, chief economist at Nationwide, said: “While the impact for most borrowers is likely to be modest, it’s important to note that household budgets have been under pressure for some time because wages have not been rising as fast as the cost of living.”
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