The Monetary Policy Committee has voted today to leave the Bank Rate at its current record low of 0.1%. Just two Bank of England policymakers voted to raise interest rates to 0.25% — deputy governor Sir Dave Ramsden, and external member Michael Saunders.
The remaining seven members of the MPC voted to maintain Bank Rate at 0.1%.
Rates were cut to their current level in March last year in response to the effects of the coronavirus pandemic.
But the reopening of the economy has fuelled price rises, prompting expectations that the Bank would increase borrowing costs.
The Bank has signalled it will raise interest rates in “coming months” as it warned of a two-year cost-of-living squeeze for households.
Investors were betting on an immediate rate rise. But policymakers stopped short of this, saying there was “value” in waiting to see how the jobs market coped with the end of the furlough scheme.
The pound fell by nearly 1% against the dollar to $1.3556 following the Bank’s decision.
Financial markets expect rates to hit 1% by the end of next year.
The Bank of England lending statistics for September show that net mortgage borrowing was £4.8 billion in September, up from £3.0 billion in August.
Mortgage approvals for house purchase increased further to 91,500, the highest since September 2007. Effective mortgage interest rates were broadly unchanged.
Net consumer credit borrowing weakened in September, with households making net repayments of £0.6 billion. The interest rate on interest-charging overdrafts increased by an additional 3.5 percentage points, to a new series high of 22.52% in September, while the rates on new consumer credit and credit card borrowing were little changed.
Private corporates borrowed £0.7 billion from capital markets in September. Small and medium sized non-financial businesses (SMEs) borrowed £1.6 billion, on net, from banks, while large businesses repaid £5.8 billion.
Overall, household and business deposits were strong in September, at £6.8 billion and £2.5 billion respectively. Deposit interest rates remain at historically low levels
With inflation pressures beginning to build, the prospect of higher interest rates becomes more likely. For a generation that has only known a world of extraordinarily cheap money the change will come as something of a shock.
Official forecasters predict that the biggest mortgage rate rises will come in 2023, the Office for Budget Responsibility (OBR) saying that inflation is likely to speed up to 4% next year.
In response, it expects a rise in the Bank rate next year, and the year after, from its current record low of 0.1%.
The OBR says the Bank Rate could go as high as 3.5% if inflation goes over 5%.
it is now time to plan the next era of the market
Scrooge-like rate increases before Christmas are rare, with only one December rise since the mid-1970s. Such a move would come outside the Bank’s normal cycle of monetary policy reports and press conferences, which explain its actions in detail. Breaking with this pattern could signal that the Bank has fallen behind the curve.
Andrew Bailey, its governor, has been playing his cards close to his chest. City economists are taking his apparent reluctance to talk down financial markets as a tacit acknowledgement that rates will now rise.
Economists at BNP Paribas term it the “sound of silence” from Bailey but it’s a delicate position to be in, with financial markets effectively painting the governor into a corner. Raising rates on Thursday would fit the picture, but a pause for breath could well embarrass the governor.
Marc Dueck, Director of ME Financial Services said, “Though buyers are no longer motivated by the tax savings on offer in the stamp duty holiday, we can expect both mortgage approvals and net mortgage borrowing to remain strong throughout Q4 and 2022, given the enduring ‘race for space’ and undersupply of UK housing.
“However, with various factors putting pressure on an interest rate increase and the Stamp Duty holiday long-gone, it is now time to plan the next era of the market. Whether base rate rises or not, mortgage rates have started edging upwards as the markets have already priced in a rate rise, and possibly two or three more by the end of next year”
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