Interest rates: “The reliable boyfriend delivers on rate expectation 

by | Aug 2, 2018

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Ben Brettell, Senior Economist, Hargreaves Lansdown: “The Bank had backed itself into a corner this month, with markets seeing a rate rise as a dead cert. So any big market reaction was reserved for a no-change decision – if rates had been left on hold, sterling would almost certainly have tanked. In the event both sterling and the FTSE were little changed on the news.

“We’d expected two of the nine-strong committee voted to leave rates on hold. But in the event the decision was unanimous, with the MPC seeing sufficient evidence that the economy had rebounded from a disappointing first quarter, and expecting 0.4% growth in Q2, with that pace maintained into Q3.

“At first glance, raising rates now looks something of a strange decision. Inflation is above the 2% target, but not disastrously so. And a large chunk of the inflation we’re seeing is down to higher oil prices – something beyond the Bank of England’s control. Wage growth is relatively subdued, and the economy isn’t exactly overheating at the moment.

“The main argument for raising rates now is that it gives the Bank more room for manoeuvre when the next downturn hits. If interest rates are 1% or more by the time the economy sails into stormier seas, policymakers will at least be able to cut rates a couple of times before cranking up the printing presses for more QE.

“So on balance the Bank’s decision looks sensible. 0.5% was supposed to be an ‘emergency’ level, and that was almost 10 years ago. The economy is undoubtedly much stronger today than in 2009. The mistake they made was cutting rates in response to the Brexit vote. If they’d held their nerve back then, rates might have been 1% or more by now, and policymakers’ jobs would be somewhat easier today.

 “Today’s rise is largely symbolic. It doesn’t change things all that much. As it stands the market’s pricing in another hike around this time next year. A deal on Brexit clouds the issue, and unless the uncertainty is lifted I’d be shocked if rates rose again in the short term.

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