| The Bank of England has announced the first increase in interest rates for over 10 years in what is a momentous and historic step. The vote was not unanimous, with seven out of the nine members of the MPC voting in favour of the 0.25% hike and two favouring no change. This adds to the list of central banks who are gradually moving away from ultra-loose policy, with the US Federal Reserve on course to raise rates again in December and the ECB tapering its QE program.
The rate hike comes at a time when the outlook for the UK economy is very uncertain, mainly due to the Brexit process. Unemployment is low but there are serious concerns about consumer borrowing, business investment and the lack of productivity, while the housing market also seems to be slowing. We therefore doubt the Bank of England will feel brave enough to raise interest rates by much next year, unless the Brexit talks take a giant leap forward. We also expect inflation pressures to ease in 2018. Markets were expecting the move and actually the tone of the statement was fairly dovish, leading to an immediate drop in Sterling, lower gilt yields and a rally in the FTSE 100. We will of course pay close attention to the impact this rate increase has on consumer and business behaviour in the UK. However, we doubt that stock markets will be unduly troubled by the Bank of England’s move, especially given the strength of both the global economy and corporate profitability. |
