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Bank of England raises interest rates: What the City is saying

05 November 2017
Bank of England raises interest rates: What the City is saying

The Bank of England raised its main interest rate for the first time since 2007, before the global financial crisis, it announced Thursday as it tackles Brexit-fuelled inflation.

Mr Carney said inflation was unlikely to return to 2% without raising rates, because the economy was growing at levels "above its speed limit".

The last cut was in August 2016 when the rate was dropped by 0.25% to shore up the economy after the vote to leave the EU.

"Though any rate rise from the Bank of England is likely to be small, it could be enough to send the pound even higher".

The winners include the 45 million saves in the UK.

Nearly four million households face higher mortgage interest payments after the rise, but it should give savers a modest lift in their returns.

The Bank estimates that nearly two million mortgage holders have not experienced an interest rate rise since taking out a mortgage. Approximately 8,1 million households service a mortgage in the United Kingdom, although approximately half have a fixed rate contract.

The average outstanding balance is £89,000 which would see payments increase by about £12 a month, according to UK Finance.

For a £100,000 balance with a £450 now monthly repayment, it will rise by £13.

But the Bank also said its forecasts are based on the assumption of a "smooth adjustment" of the United Kingdom economy to Brexit, something that has been thrown into increasing doubt by the failure of the Government to make any substantive progress in its Article 50 divorce negotiations with the European Union.

People with variable rate mortgages will be hit by the hike, with around one in 10 households now using this mortgage type.

This implies that if the economy shows further signs of weakness, any further rate hikes will be delayed.

Some predict rates could rise again as soon as February, but others expect there will be a pause until at least later in 2018. While inflation hit 3% in September, wage growth was only 2.1%.

But when supply exceeds demand, inflation tends to fall below that 2% target.

GBP/USD at hourly intervals, capturing market reaction to Thursday's rate hike.

"This month's MPC decision is an important signal to the public that the era of very low interest rates is coming to an end".

Borrowers tend to spend more of any extra money they have than lenders, so the net effect of lower interest rates through this cash-flow channel is to encourage higher spending in aggregate.

"The MPC now judges it appropriate to tighten modestly the stance of monetary policy in order to return inflation sustainably to target", the meeting minutes said.

The weak pound since last year's Brexit referendum has ramped up the cost of goods imported into Britain, and therefore consumer prices.

Sterling is set to remain volatile due to Brexit uncertainty.