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Bank of England raises interest rates to mixed opinion
02 August 2018 London
Reporter: Jenna Lomax

Image: Shutterstock
The Bank of England has raised interest rates by a quarter of a percentage point, from 0.5 percent to 0.75 percent—the highest level since March 2009.

At a meeting ending on the 1 August 2018, the BoE’s Monetary Policy Committee (MPC) voted unanimously to increase the bank rate.

The MPC voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion.

The BoE said its decision was very heavily considered around the possible outcomes of Brexit in the coming months.

Mark Carney, governor of the BoE said: “The MPC continues to recognise that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal.”

The BoE added: “The MPC judges that an increase in bank rate of 0.25 percentage points is warranted at this meeting. Any future increases in bank rate are likely to be at a gradual pace and to a limited extent.”

However, according to Nigel Green, founder and chief executive of deVere Group, hiking interest rates now, only the second time since the financial crash, is “premature”.

Green stated: “There seems little real justification to increase interest rates now. Has the decision been motivated in order to protect reputations and credibility after the bank’s governor and some of the committee had effectively already said the rise would happen?”

The deVere CEO concluded: “Whilst today’s decision to hike rates is unnecessary, I think that the BoE is likely to refrain from any more increases until after Brexit.”

Graham Bishop, investment director at Heartwood Investment Management, the asset management arm of Handelsbanken in the UK, wrote a blog about the decision entitled: Bank of England: A surprise reaction to unsurprising news.

In it Bishop said: "Given that the BoE did exactly as anticipated, and that Carney’s tone at the ensuing press conference was mildly hawkish, the only slight surprise has been the immediate market reaction – a fall in sterling and gilt yields."

Angus Dent, CEO of ArchOver, stated the decision was cautious. He said: “This is certainly a step in the right direction for the cautious BoE.”

“While such an incremental rise won’t shake the earth, and probably means business as usual, it nevertheless spells good news for the UK.”

Timothy Graf, head of macro strategy Europe, Middle East and Africa at State Street Global Markets, commented: “Today’s hike and messaging from the MPC was more or less what markets expected heading into this pivotal policy meeting.”

He added: “By the time the next quarterly inflation report is released in November, the BoE might have a clearer idea of what Brexit looks like and whether inflation remains above target.”

“With rates now out of the way as a market talking point for the next few months, focus is likely to return to the ever-changing nature of Brexit. We suspect sterling will likely become even more correlated to headline risk.”

McAndrew said: "With today’s hike, the committee will certainly be hoping a hard Brexit can be avoided. They will be watching negotiations closely from the sidelines given guidance of roughly a once-a-year pace of hikes.”
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