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Jessica Fino 2 Nov 2017 01:56pm

BoE announces first interest rate rise in 10 years

The Bank of England has decided to raise interest rates by 0.25% to 0.5%, the first rise since July 2007

Governor Mark Caney announced on Thursday the bank would reverse the rate cut of August 2016.

The decision followed yesterday’s meeting where the Monetary Policy Committee (MPC) voted by a majority of 7-2.

Last year’s cut was aimed at helping Britain’s economy through the aftermath of the Brexit vote, while the upcoming rise is expected to hit 3.7m households who are under a standard variable rate (SVR) or tracker mortgage.

The BoE said in a statement, “The MPC now judges it appropriate to tighten modestly the stance of monetary policy in order to return inflation sustainably to target.

“All members agree that any future increases in Bank Rate will be at a gradual pace and to a limited extent.”

The Bank also warned that the decision to leave the European Union was having a “noticeable impact on the economic outlook”.

“Uncertainties associated with Brexit are weighing on domestic activity, which has slowed even as global growth has risen significantly.”

It added that Brexit-related constraints on investment and labour supply appeared to reinforce the slowdown “in the rate at which the economy can grow without generating inflationary pressures”.

Andrew Sentance, senior economic adviser at PwC, said the MPC was right to raise interest rates, especially when considering the high inflation that had been driven by the weakness of the pound and low unemployment levels.

"The MPC faces a long-term challenge of raising interest rates back to some sort of normal level after an exceptional and unprecedented decade of low rates since the financial crisis,” he said.

"Further interest rate increases should be slow and gradual, but this is the first step along that road."

However, Lisa Hooker, head of consumer markets at PwC, said that in 2018 when consumers begin to feel the effects of the rise, families would be hit the hardest.

Rain Newton-Smith, CBI’s chief economist, said, “While it’s the first rate rise in over a decade, it is only taking the rate back to the level seen in August 2016 and at 0.5% it remains near rock bottom.

“Businesses will be watching the reaction of consumers closely and what’s important is the pace of any future rises. As rates creep up, it’ll be important to keep an eye on the impact for those at the lower end of the income scale.”


THE EFFECT ON BUSINESSES


Ahead of the MPC’s decision, insolvencies practitioner Begbies Traynor warned that nearly half a million businesses are currently in a state of significant financial distress, and this could increase if rates were to go up.

According to the business recovery firm’s red flag alert research, 448,011 businesses were experiencing significant levels of financial distress at the end of the third quarter, up 27% compared to the same period last year.

Moreover, 250,000 of these companies ended the quarter with negative net worth. These are called “zombie” companies, as they survive due to the prolonged low interest rate environment and flexible labour market but do not have adequate working capital to fund any growth or absorb rising input prices.

As a result, Begbies Traynor warned that an interest rate rise, together with increasing employment costs, could mean many of these struggling companies will not have the reserves available to survive.

Mike Cherry, Federation of Small Businesses (FSB) national chairman, said the rise will mean more cost pressures for small firms as they battle spiraling prices and flagging consumer demand. 

He added that only one in 10 small firms are currently applying for external finance and the rates rise "could heighten the sense that borrowing is too expensive if you’re a small firm. That would threaten investment, growth and job creation". 

Professional and financial services companies were the worst affected by financial distress in Q3, with the number of them increasing 42% to 26,113 and 34% to 11,079 respectively.

The worst performing region of the UK by volume was London, with a total of 107,896 companies in a state of significant financial distress.




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