Cookies on Pinsent Masons website

This website uses cookies to allow us to see how the site is used. The cookies cannot identify you. If you continue to use this site we will assume that you are happy with this

If you want to use the sites without cookies or would like to know more, you can do that here.

Bank of England votes through first interest rate increase since 2007

The Bank of England's Monetary Policy Committee (MPC) has voted to increase the central bank interest rate for the first time since 2007.03 Nov 2017

The increase, from a record low of 0.25% to 0.5%, was backed by seven of the nine members of the MPC. The decision reverses the cut of 0.25 percentage points introduced in August 2016 following the UK's vote to leave the EU and restoring the post economic crisis low of 0.5%, where it has sat since March 2009.

The committee voted unanimously to maintain the current level of UK quantitative easing (QE), consisting of £10 billion worth of sterling non-financial investment-grade corporate bond purchases and £435bn worth of UK government bond purchases.

The MPC is required to set interest rates to meet the UK's 2% inflation target in a way that helps to sustain growth and employment. The inflation figure for October is expected to peak above 3%, while low unemployment and "resilient" consumer confidence mean that there is little "slack" in the economy with which to "accommodate an extended period of inflation above the target", according to the MPC.

"In line with the framework set out at the time of the [Brexit] referendum, the MPC now judges it appropriate to tighten modestly the stance of monetary policy in order to return inflation sustainably to the target," it said in a statement.

"Monetary policy continues to provide significant support to jobs and activity in the current exceptional circumstances. All members agree that any future increases in Bank Rate would be expected to be at a gradual pace and to a limited extent," it said.

Banking expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com, said that the announcement did not necessary signal the start of a steady increase in interest rates.

"Whilst this may be welcome news for banks' balance sheets after a decade of flatlining, there is no indication of this rise constituting the start of a continuing upward trend in rates," he said. "In the current climate, there is also no guarantee of the value of sterling gaining much lost ground off the back of it."

"Of more concern will be if there is much impact on borrowers' appetites to invest or spend," he said.

The central bank rate reflects the interest charged by the Bank of England on the money it lends to other banks. It is also widely used by retail banks as a reference rate for savings accounts and loans, including mortgages.

The MPC currently anticipates UK GDP to grow "modestly" over the next few years if accompanied by "the gently rising path of Bank Rate implied by current market yields". However, it stressed that its projections were based on "the average range of possible outcomes for the [UK's] eventual trading relationship with the [EU]" and "households and companies bas[ing] their decisions on the expectation of a smooth adjustment to that new trading relationship" in the interim.

"Monetary policy cannot prevent either the necessary real adjustment as the United Kingdom moves towards its new international trading arrangements or the weaker real income growth that is likely to accompany that adjustment over the next few years," the MPC said in its statement. "It can, however, support the economy during the adjustment process."