Bank of England raises interest rate for first time in a decade

06 Nov 2017

Business

The Bank of England has voted to increase interest rates for the first time since 2007.

On 1st November, The Monetary Policy Committee (MPC) voted by a majority of 7-2 to increase the Bank Rate of interest by 0.25% to 0.5%. The decision was taken to keep a lid on the current rate of inflation.

There have been a variety of reactions to the decision, with the British Chambers of Commerce urging the government to take action in favour of businesses in the Autumn Budget to be revealed on 22nd November.

Mike Spicer, Director of Economics at the British Chambers of Commerce (BCC), said: “Our preferred outcome was for a further period of monetary stability, with interest rates steady over the near term. Today’s quarter point rise may have little effect on most companies, but many will view this as the first step in a longer policy movement – not as a simple reversal of last year’s cut.

“These are challenging times for monetary policymakers. The MPC had the unenviable task of weighing future risks to inflation, from a tight – and tightening – labour market, pass-through from a weaker pound and rising commodity prices. Against this, they needed to consider the future risks to under-shooting the inflation target from weak growth, fragile business confidence, and the effects of uncertainty.

“These are finely-balanced judgements: while interest rates will need to return to historic averages at some point, it should be done slowly and with reference to the ever-changing economic context.

“With the Bank of England’s latest forecasts of sluggish growth for the next few years, the government must use the upcoming Autumn Budget to boost business confidence and investment, and reduce the pressure on prices from policy decisions such as the forthcoming hike in business rates.”

In a summary of its monetary policy, the MPC  said: “The decision to leave the European Union is having a noticeable impact on the economic outlook.  The overshoot of inflation throughout the forecast predominantly reflects the effects on import prices of the referendum-related fall in sterling.

“Uncertainties associated with Brexit are weighing on domestic activity, which has slowed even as global growth has risen significantly.  And Brexit-related constraints on investment and labour supply appear to be reinforcing the marked slowdown that has been increasingly evident in recent years in the rate at which the economy can grow without generating inflationary pressures.”