The Bank of England interest rate has been increased from 0.25% to 0.5%. Big deal some may say, but this is the first UK interest rate increase for over 10 years. The Bank of England governor, Mark Carney, has stated that it is likely that the UK interest rate will rise twice more over the next three years.
UK Interest Rate Increase to Hit Mortgage Payers
The rate was dropped from 0.5% to 0.25% in August last year, and this increase brings it back to last year’s level. The 0.25% rate announced in August 2016 was made in response to the UK vote to leave the EU. While this is just a small increase (though 100% in percentage terms) it will hit mortgage payers, particularly those with variable rate mortgages. Those with a £200,000 mortgage will pay an extra £500 interest each year. That said, Mr. Carney stated that mortgages, loans and credit cards may not be affected immediately.
Savers will save the same relative amount each year, and those on the point of purchasing a pension annuity will certainly gain. However, an extra £250 per annum for each £100,000 saved will not over excite many. That said, better deals should be available for those willing to hunt around for the best annuity offers.
UK Inflation Rate Rising Faster Than Hoped For
The rate increase was justified by particularly low unemployment, a high level of global economic growth and UK inflation which is rising faster than the exchequer had hoped for. The UK economy is expected to grow by around 1.7% over the next few years, a growth rate that would justify two more increases in the UK interest rate during the next three years.
One immediate result of the rate increase announcement was an approximate 1% drop in the value of sterling against the euro and the dollar. It had been expected, or at least hoped, by many that the interest rate increase would have been higher or that more rate cuts would have been announced for the near future.
Effect of Brexit on UK Currency
The MPC (Monetary Policy Committee) stated that Brexit has had a noticeable impact on the outlook for the UK economy. According to Carney, the potential economic growth of the UK is being fettered by the Brexit vote. He went on to suggest that Brexit negotiations will have a significant future impact on the UK economy.
He also stated that that rate hikes were essential to maintain a 2% inflation rate. This is because the rate of economic growth in the UK is too fast for its economy to handle. The inflation rate was 3% in September, 2017. 2% will take some work to achieve.
Bank of England Interest Rate Manageable
The business world believes that a 0.25% interest rate increase is manageable, but that any further rate increase in the short term would harm many businesses. For now, the increase in the Bank of England interest rate is manageable, although many businesses may suffer if there is another increase soon. The inflation rate is believed to be likely to reach a maximum of 3.2% this month. Time will tell what the effect of this will be.
