Interest rates set to rise above 0.5% for first time since 2009 as economy improves – but expert warns it could be tricky to hike them any further before Brexit

Britons could be in for higher borrowing costs as economists expect interest rates to go up next week.
Confidence the economy has rebounded after a blip in the first three months and that wages will improve in the coming months are major factors in the potential rise.

If the Bank of England’s nine policymakers do raise the base rate from 0.5 per cent to 0.75 per cent on Thursday, it would be the highest it has been since March 2009, when it was cut from one per cent to 0.5 per cent during the financial crisis.

The predictions come as doubt was cast on a possible hike earlier this month. That came after inflation held steady at 2.4 per cent, instead of rising to 2.6 per cent as economists expected.

However, it still looks more likely that policymakers will vote to raise interest rates by a small 0.25 per cent on 2 August, with recent data suggesting economic growth rebounded in the second quarter after a slowdown at the start of the year.

A survey of nine economists by website shows all of them predict a base rate rise, mostly because they believe the economy has improved, inflation is set to go up and so are wages, despite having stagnated so far.

Wage growth (excluding bonuses) slowed to 2.7 per cent while the figure including bonuses remained stuck at 2.5 per cent in the three months to May, according to the latest figures by the Office of National Statistics.

However, the economy is predicted to have grown by 0.4 per cent in the second quarter, up from 0.2 per cent between January and March.

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August interest rate rise moves step closer

he Bank of England has held interest rates but signalled an August rate rise is more likely than previously thought.

In a decisive move, Andrew Haldane, the Bank’s chief economist, joined two other Monetary Policy Committee members in voting to raise rates to 0.75%.

The nine-member MPC was split 6-3, with Bank governor Mark Carney leading the group who voted to hold rates at 0.5%.

The last time three people “dissented” from the overall view, in June 2017, rates rose the following November.

But economists believe that if the economy does show signs of picking up, an August rise is in play. Government borrowing figures published on Thursday boosted hopes among some economists that the economy may be gaining momentum.

The pound jumped by about a cent against the dollar following the Bank’s decision, climbing back above the $1.32 level, as the possibility of an August rate rise appeared to increase.

The MPC said that the poor economic growth figures of the first three months of a year was likely to prove “temporary” and that the speed of growth would pick up.

As economic momentum improves, fears over rising inflation grow and pressure increases for interest rates to rise.

The level of interest rates is the Bank’s main tool for controlling any increase in prices.

“A key assumption in the MPC’s May projections was that the dip in output growth in the first quarter would prove temporary, with momentum recovering in the second quarter,” the committee said.

“This judgement appears broadly on track.

“A number of indicators of household spending and sentiment have bounced back strongly from what appeared to be erratic weakness in Q1 [January to March], in part related to the adverse weather.

“Employment growth has remained solid.”

The MPC said prospects for global growth also remained strong, despite some weakness across Europe.

It is the first time Mr Haldane has “dissented” from the majority view on the MPC since he joined the Bank in 2014 and is significant given his role as the leading economic expert at the institution.

Before today’s decision the markets were split 50/50 on whether there would be a rate rise at the MPC’s next meeting in August.

After the news that Mr Haldane has joined those pressing for a rise – MPC members Ian McCafferty and Michael Saunders – it is likely the market expectation for a rate rise will strengthen.


Interest rate rise chances dim as inflation falls

The chances of an interest rate rise this year have receded after Consumer Price Inflation fell to 2.4% in April – its lowest level since March 2017.

The fall from 2.5% in March was partly due to the timing of Easter, which meant a seasonal rise in air fares was not included in April this year.

The pound fell about half a cent against the dollar after the figures were released before rising to $1.3368.

Analysts now question the prospect of any rate rises this year.

“Inflation falling for the third month in a row further dents any hopes of a late-summer rate rise from the Bank of England,” said Ben Brettell, senior economist at Hargreaves Lansdown.

Neil Jones at Mizuho Bank said: “It is starting to appear the weaker CPI is more structural and not just because of the bad weather. Brexit uncertainty continues to weigh and may indeed put the Bank on hold throughout the summer and beyond.”

However, Nikesh Sawjani, UK economist at Lloyds Bank commercial banking, disagreed.

“The impact of recent increases in oil prices and previously announced hikes in utility tariffs should ensure that inflation proves more ‘sticky’ than it has done so far this year,” he said.

“Against such a backdrop, and with the economy expected to recover in the second quarter, we expect the Bank of England to hike interest rates at its meeting in August.”

Mike Hardie of the Office for National Statistics said the fall in inflation was partially offset by the rise in fuel prices, which are now at their highest level for three-and-a-half years.

The average price of petrol has risen to 127.22p a litre and diesel to 129.96p following a rapid rise in the cost of oil.

The figures did show the effect of the new sugar tax on soft drinks and juices.

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Interest Rates to Rise Twice This Year, Says EY Item Club

The Bank of England is likely to raise interest rates twice this year and twice in 2019, despite a sluggish economy, says a forecasting body.

Bank governor Mark Carney has said a rate rise is “likely” this year, but any increases will be gradual.
However, the EY Item Club said a tight labour market and firming earnings growth were likely to fuel “hawkish instincts” at the Bank.

The forecaster predicted GDP growth of 1.6% this year and 1.7% in 2019.

It said the expected rate rises would allow the Bank to “gradually but steadily normalise monetary policy”.
UK interest rates currently stand at 0.5%. Many economists and investors in the markets believe that the Bank’s Monetary Policy Committee (MPC) will vote for a 0.25% rate rise at its May meeting.

‘Chugging along’

Howard Archer, chief economic adviser to the EY Item Club, said there was a risk that two rate hikes this year would exert “unnecessary pressure” on consumers.

However, he added that the growth of fixed-rate mortgages meant that fewer homeowners would be affected by a rate rise.

“In addition, the burden of interest payments to the average household was at a record low at the end of 2017, and so consumers are in a relatively healthy position to cope with dearer money,” he said.

Mr Archer said the UK economy was “chugging along at a fairly steady but uninspiring rate”, with inflation continuing to fall and a tight jobs market expected to “deliver some uptick in pay growth”.

At the same time, separate research by Deloitte showed an improvement in UK consumer confidence, but said this had “yet to translate into an overall increase in spending”.

Deloitte’s latest quarterly Consumer Tracker survey said UK consumers were feeling “more upbeat” about their personal finances.

However, people were still prioritising essential spending over luxuries, with the retail and casual dining sectors facing “unprecedented challenges”.


Interest rate rise of 1% would cost average UK homeowner £930 a year

mortgage set to rise

A Bank of England rate change would add £10bn to UK mortgage bill, Savills says.

A 1% rise in interest rates would add around £10bn to the UK’s mortgage bill, according to analysis from estate agent Savills.

The increase would equate to adding £930 a year to the cost of servicing the average mortgage. Borrowers on variable rate deals influenced by movements in the Bank of England base rate would be the first to feel the pain, putting the annual mortgage bill up by £4.3bn immediately, Savills said.

The 59% of borrowers on fixed-rate deals would feel the impact later, when their existing mortgage deals come to an end. Of the total increase, Savills calculates that buy-to-let landlords would pay an additional £2.4bn, with other home owners paying £7.8bn more.

“This would bring an end to the historically low mortgage costs that have boosted housing affordability and limit the buying power of those needing a mortgage, and underscores our forecasts for more subdued house price growth over the next five years,” said Lucian Cook, head of residential research at Savills.

Savills forecasts that average UK house price growth will stand at 14% in total over the next five years.
Borrowers are bracing themselves for further possible interest hikes following the increase last year from 0.25% to 0.5%. Earlier this month, the Bank of England governor, Mark Carney, readied borrowers for further and faster interest rate hikes, although he also stressed that rises would be limited and gradual.

With the possibility of further base rate rises on the horizon, homeowners looking to lock into a long-term deal to get some certainty over their repayments may also find the rates on offer have edged up. reported last week that average rates on 10-year fixed-rate mortgages on the market have started to edge up from an all-time low. Savills said the total number of outstanding mortgages has fallen by over half a million over the past 10 years, as existing homeowners clear their mortgage debts at the same time as younger households struggle to buy homes.

Savills based its research on figures from the Bank of England and UK Finance, the trade body for British banks.

Interest rates tipped to remain on hold as Bank of England avoids another hike immediately after its first in a decade

The Bank of England is widely expected to keep interest rates on hold this week after raising them for the first time in a decade last month.

The Bank voted 7-2 to increase rates to 0.5 per cent in November in a bid to dampen rising inflation – but with a downbeat picture of the economy painted alongside the move, that is forecast to be the only move for some time.

Despite the Bank saying that two more rate hikes are likely over the next three years in order to return inflation back to its 2 per cent target, many experts believe rates will remain at 0.5 per cent for at least another year.

Ryan Djajasaputra, economist at Investec, said: ‘(The) Bank of England is all but certain to hold fire at its policy meeting on Thursday.

‘We will be looking for any clues over the timing of any future policy tightening in the minutes.’

A further indicator that the Bank is unlikely to raise rates again any time soon comes from the mortgage market, where fixed rates have remained fairly steady since the November hike.

That stability comes after lenders bumped up costs ahead of the interest rate decision, as their funding costs influenced by money market swap rates shifted up in expectation of the hike to 0.5 per cent.

Savers have faced mixed fortunes since the rise, with some banks and building societies choosing to pass on the 0.25 per cent rise to them – but others failing to do so.

Challenger and smaller banks, alongside building societies, were the most likely to pass on the rise. Hardly any savers in popular easy-access accounts or in easy-access cash Isas with Barclays, NatWest, RBS, Lloyds, HSBC, Halifax and Santander have benefited from the full rise