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YOU ARE HERE: Home > News > 2006 > Bank of England Surprises with Base Rate Hike |
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Bank of England Surprises with Base Rate HikeA reduced seven member Monetary Policy Committee (MPC) surprised most economists and market watchers as the Bank of England announced at midday today that the base rate was raised by a quarter point to 4.75% from 4.50%, where it had sat since August 2005. The immediate reaction was for shares, Gilts and short sterling to sell off as the majority were caught out by the surprise move. The last time the MPC announced a move, when it cut rates from 4.75% to 4.50% at the August 4th meeting of last year, the move had been well telegraphed. This time, there was no preparation and no hinting. It is not that a rate increase at some point wasn’t expected, it was. It is just that it hadn’t been expected this month. For now the higher rate will begin to feed through into people’s budgets as those with variable rate debts the first to see the increase, though it is hoped that savers will not be far behind. For a household with a £150,000 interest only mortgage, the 0.25 percentage point will mean in increase of £31.25 a month in interest payments. Across the globe other central banks have been raising rates, with the Bank of England the only major central bank not joining in the rate-raising party during the last 12 months. The European Central Bank continued the parade of rising rates when 45 minutes later it raised their Base Rate by 0.25 percentage points to 3% in a move the markets had been expecting. Discussion has already turned to what the MPC will do next. Is this a solitary pre-emptive anti-inflation move, or is this the first move of many? The consensus is that it is not the first of a series. It is possible there could be another increase before the year is out, but the MPC will want to see how the UK economy progresses before making a decision. In recent months house prices have picked up again with many households have actually been paying down their unsecured debts. And yet a the same time house repossessions have been increasing and personal bankruptcies have hit decade highs. Whilst in the High Street, retailers are feeling the pinch. However, none of this should be of any direct consequence to the MPC when making a rate decision. They are tasked with managing inflation. Keep it from going over 2%, based on a 2-year cycle. And they have one weapon in their arsenal - interest rates. How house prices, retail spending and consumer debt are performing are irrelevant in themselves. How they may impact inflation in the future is an issue, but whether a rate hike or series of hikes means you owe more on your house than it is worth or whether it means you can’t afford your debt repayments isn’t, and shouldn’t, be of relevance. Inflation is what matters. Inflation is currently at 2.5% and rising. Energy and utility bills are going through the roof. Many food prices are expected to rise. The deflationary effect of cheap goods from China, India and Asia is waning, those countries have higher interest rates and inflationary pressures too. For British households water, gas, electricity and food are necessary expenses, another DVD player or plasma screen TV is not. And it is those necessary expenses that are rising. The Great British public know it and the Bank of England know it too. The question is, "What, or rather when, will the Bank of England do something about it again?"
Published Thursday August 3rd 2006, 12:55pm |
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