It has been over ten years since an interest rate rise, but one could soon be on the way the Bank of England has hinted.
The Bank of England (BoE) has held the base rate at 0.25 per cent, following a 7-2 decision by the Monetary Policy Committee (MPC).
However, there was a direct hint from the committee that the bank may raise rates soon due to better than expected growth figures, strong employment numbers, and creeping inflation. The MPC’s more hawkish language has caused sterling to jump to a 15-month high against the US dollar.
The committee has asserted that monetary policy ‘could need to be tightened’ if projected inflation increases come to pass. The bank has predicted inflation to reach over 3 per cent by October this year, which could potentially lead to an interest rate adjustment as early as November.
But before savers get their hopes up it should be remembered that the MPC has previous form for hinting that a future rate rise is on the cards, only for it not to materialise. In 2013, for instance, BoE governor Mark Carney said he would consider raising rates when unemployment fell below 7 per cent – something that has failed to play out.
According to Ross Andrews, director of fixed rate bond provider, Minerva Lending, savers ‘continue to be teased’. He adds: ‘We know rates have got to go up at some point in the near future but Britain’s transition from a low interest rate environment, which has seen an entire generation grow up unable to earn anything other than paltry interest on savings, is taking an achingly long time.
‘Inflation has bounced back and that’s sure to focus minds in Threadneedle St but the average person, with savings of £26,180, is watching £759 worth of value disappear every year unless they can protect it with investments.’
Nick Dixon, investment director at Aegon, agrees that a rate rise is ‘overdue’.
‘Unemployment is the lowest in 42 years and inflation exceeds its 2% target. The challenge, however, is understanding whether inflation is structural or a blip linked to the 2016 decline in sterling,’ he says.
‘With increasing demand for pay rises to make up declining real income, the inflation challenge is becoming structural.
‘While there has not been a rate rise today, over the next 12-24 months rates will rise higher and faster than market expectations. This will be good news for those seeking annuity income or with cash savings and bad news for mortgage holders.’
This is article was originally written by our sister publication Moneywise.
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