18 Jan 2018

First rise in UK interest rates

Thursday 2nd November is a historic date: the Bank of England raised its key interest rate from 0.25% to 0.5%. This is the first time for ten years that the Bank has raised interest rates. Its last move was to cut the rate from 0.5% to 0.25% after the referendum vote to leave the EU in June 2016.

The move had been widely anticipated by financial markets. The US Federal Reserve has already raised US interest rates and the relatively high UK inflation rate (recently over 3% compared with the bank’s official 2% target) meant the Bank had little choice in the matter.

Though the Bank remains sensitive to the uncertainties of BREXIT, which may put a brake on the UK economy, its latest comments suggest a rise in base rate towards 1% by late 2019. This assumes the UK economy will continue to grow relatively slowly, so if it does better, we should expect interest rates to rise faster and further than that.

A slow and gentle rise in interest rates poses little threat to financial markets, so it need not concern investors. But analysts will be keeping a close eye on inflation and wage increases. In particular, if wage increases accelerate, markets will start to anticipate quicker and larger interest rate increases.

Bear in mind, though, that the European Central Bank is in no hurry to raise its interest rate. And, unlike previous eras when inflation was rising globally, there is now no sign of a general rise in inflation.

Overall, we therefore think the effects of the rate increase will be limited, with the main effect being limited to a modest rise in UK mortgage interest rates.

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