The Bank of England’s interest rate increase from 0.5% to 0.75% demonstrates that the nine-member monetary policy committee feels the economy is robust enough to sustain the rise. The Bank is working towards their pre-planned 2% target and is confident that businesses can absorb the increases.
While the effect on borrowing is relatively minimal – those who have borrowed capital at variable rates will feel a small hike (£25 per month on a £200,000 loan) – the bigger risk may be around consumer confidence.
Rumblings of discontent
It’s fair to say business groups don’t agree with the rise. Suren Thiru, Head of Economics at the British Chamber of Commerce called the decision “ill-judged” and “unnecessarily risks the UK’s growth prospects” while the Institute of Directors feels the Bank has “jumped the gun”.
Ostensibly the rise is aimed at controlling inflation with the Governor of the Bank of England, Mark Carney, confirming that a key driver for the rise is to “make sure inflation is going to return sustainably to target”. Arguably, the inflation Carney is looking to curb may be driven by a Brexit-induced increase in the cost of imports and a weakening pound – rather than simply a strong economy that can weather the interest rate increase.
On balance, it’s a relatively modest step towards a preconceived target, and not everyone agrees with it. Thiru feels the rise “focuses on an idealised direction” rather than “economic reality”.
Will consumers run for the hills?
The 0.25% increase was expected and will have a modest effect on the cost of borrowing, but will it have the impact on consumer confidence that some fear?
There are problems in the economy: the UK’s high street is being decimated by online alternatives, business rates have risen sharply for some, economic growth is slowing, spending is debt-fuelled for the first time since the 1980s, and there is a looming ‘hard’ Brexit. It’s fair to say the business climate has its challenges. With more increases likely, businesses will need to prepare.
If people stop spending and save more, some businesses will be hit with reduced revenues and increased costs. How consumers react will be interesting: if a sustainable level of spending and economic growth continues then businesses shouldn’t feel much impact, but if increases to mortgages, and the cost of debt, lead to more people saving because they feel nervous about the future, businesses will likely suffer.
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