The Bank of England’s Monetary Policy Committee today voted by seven votes to two to raise interest rates by a quarter point to 0.5%.
The Bank of England had signalled the move clearly in advance, meaning that the rise was heavily priced in on markets.
The move reflects growing confidence at the Bank in the UK’s economic recovery, as well as possible concern over rising inflation, which struck 3% over the summer – far above the Bank’s 2% target. The move may also be designed to provide the Bank with some future room for manoeuvre, should an economic slowdown make a rate cut amenable.
After a decade of dovish decisions, it was a historic move. Yet it is not expected to mark the start of a significant trend of rising rates. Rather, it is expected that the Bank will tread very carefully, not least given the UK’s relatively subdued economic growth rate. Market pricing shows investors anticipate that, even by mid-2021, the Bank rate will only have risen to 1%.
Although inflation is currently above the Bank’s long-term target, the conservatism of this month’s rate rise implies that it is not overly concerned about the medium-term outlook for inflation. Some of the inputs that have contributed to the recent rise in UK inflation are reckoned to be short-term factors linked to the post-referendum fall in sterling.
Yet despite today’s rate rise, and the expected rises to come, savers and investors alike need to remain vigilant about what proportion of their wealth they hold in cash. Since interest rates are widely expected to remain below the level of inflation for the foreseeable future, savers should remember that it is real assets – notably equities, bonds and property – which offer the strongest potential for real returns.