Bank vote could see rates hit their highest level since 2009 in `close call´ decision
The Bank of England will decide whether to hike interest rates to their highest level for more than nine years next week as economists predict a “close call” decision.
In what would mark another milestone for the economy in its recovery since the financial crisis, members of nine-strong Monetary Policy Committee (MPC) are expected to increase rates from 0.5% to 0.75% on Thursday.
The move would see rates hit their highest level since March 2009, when they were slashed from 1% to 0.5% as the financial meltdown and recession wrought havoc.
Investec economist George Brown said he is “fairly confident” the Bank will move to raise rates and is pencilling in an 8-1 vote in favour, with Sir Jon Cunliffe the only dissenter.
He believes the economy has performed in line with the Bank’s last forecasts in May, when it backed off from a widely anticipated hike and said it wanted to wait and see how the economy recovered after a weather-hit start to the year.
The bank also edged a step closer to pressing the button in June when its chief economist Andy Haldane joined two fellow policymakers in calling for a rise.
Howard Young at the EY Item Club believes the vote may be less definitive, given that inflation figures recently came in lower than expected – unchanged at 2.4% in June, while wage growth has also been weak.
He said: “It has recently become a closer call, but we believe that the odds still favour the Bank of England lifting interest rate from 0.50% to 0.75% on Thursday after the August MPC meeting – most likely following a split vote.”
He added: “With interest rates down at 0.50%, the Bank of England would clearly likely to gradually normalise monetary policy given that it is essentially an emergency low rate.
Bank of England
“Furthermore, inflation remains above target and the labour market looks relatively tight with the MPC considering that there is little slack left in the economy.”
The decision to raise rates would come as a blow to some borrowers on variable rate mortgages, but would offer relief to savers who have seen paltry returns on deposits since rates have languished at 0.5% or below since 2009.
It is thought the bank’s latest set of forecasts in the accompanying inflation report will reinforce the case for a rise, with many economists expecting growth to have recovered to 0.4% in the second quarter after slowing to 0.2% in the previous three months.
The bank had already predicted in May that this would be the case and its latest set of forecasts are set to confirm its outlook for the year ahead.
But the bank is likely to increase its inflation forecasts, with a weaker pound and higher oil and energy prices pushing up the outlook and further justifying the need for a rise.
A rate rise in August would be the second hike in the past year, after the Bank voted for an increase from 0.25% to 0.5% in November – the first such move for more than 10 years and reversing the cut made in the aftermath of the Brexit vote.
Mr Brown believes this will be the only increase in 2018, however, predicting a quarter point rise every six months until they reach 1.5% in 2020.
“We think the bank wants to raise rates in a gradual way and that would be consistent with the next one in February,” he said.
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