The Bank of England has raised interest rates from 0.5% to 0.75%, the highest level since the financial crisis almost a decade ago, with the financial sector warning that it is taking a gamble as the outcome of Brexit remains unclear.
Several experts have challenged the need for a rise now, given not only the Brexit risks but also the backdrop of a sluggish economy and the potential negative impact from US President Donald Trump’s import tariffs in global growth.
The interest rate hike has been slammed as “premature” by the chief executive of deVere Group, who added the decision could be “motivated to protect reputations.”
“Hiking interest rates now – for only the second time since the financial crash – is, to my mind, premature.
“At just above the Bank’s target of 2%, inflation is not currently a key issue. In addition, major uncertainty surrounding Brexit, the looming threat of international trade wars, and absolutely average economic growth, business and consumer confidence are on the slide.
“As such, there seems little real justification to increase interest rates now,” said Nigel Green.
“Whilst today’s decision to hike rates is unnecessary, I think that the Bank is likely to refrain from any more increases until after Brexit,” he added.
For Aviva Investors, the BoE has to tread carefully from now on.
“We hope the Bank is right. But growth is not that robust and is vulnerable to those known and unknown shocks, confidence is mixed at best and inflationary pressures are pretty muted across the economy. A base rate rise to 0.75% is not going to derail the economy.
But it is not entirely clear that a hike was merited in today’s circumstances, nor that further increases will be necessary either. The Bank needs to tread cautiously from here and will be monitoring any impact of today’s decision very carefully,” said Stewart Robertson, senior economist at Aviva Investors.
The increase is only the second time the BoE has lifted interest rates in 11 years, following its increase from a post-Brexit emergency low of 0.25% in October last year.
Raising interest rates will mean higher borrowing costs on mortgages and loans for hard-pressed consumers and businesses as they adapt to Britain leaving the EU.
“Looking forward two factors will be critical in determining future interest rates. First the final Brexit trade deal will impact the level of sterling and hence inflation.
Second is the labour market and whether wage pressures intensify, especially in the public sector, become embedded and strengthen inflationary trends.
If sterling depreciates and wage increases lead to higher prices, there will be pressure for interest rates to rise higher and faster than markets currently expect,” said Nick Dixon, investment director at Aegon.
Several experts had urged the Bank to keep rates on hold to help support jobs and growth amid mounting fears about the economic impact of Britain crashing out of the EU without a deal.
Philip Smeaton, chief investment officer at Sanlam UK said: “With the Fed hiking interest rates, the European Central Bank winding down quantitative easing, and even the Bank of Japan building in the flexibility to reduce monetary stimulus, the Bank of England must have felt left out.
Today Mark Carney and the MPC reluctantly raised rates by a quarter of a percent while house prices stagnate, businesses postpone investment, and consumers think twice about using their credit cards.
Continuing positive employment figures and wage growth help to justify today’s increase and the Bank will be hoping that the economy strengthens in the second half of the year. But with the clock ticking on a Brexit deal and nervousness on the high street, this optimism might be misplaced.”
The Bank’s Monetary Policy Committee had been expected to raise interest rates in May, but held fire because the economy went through a weak patch at the start of the year.
Led by governor Mark Carney, the Bank is now confident that the dip was temporary and that economic growth will recover from the 0.2% rate seen in the first quarter, to 0.4% in the second quarter and maintain that pace later in the year.
The pound was trading down 0.82% against the dollar after the Bank of England’s monetary policy committee unanimous vote.