Bank of England Base rate up to 0.75%Make Text Bigger
The Hawks have it. The Bank of England’s Monetary Policy Committee have voted unanimously to increase the Base Rate by 0.25% to nearly a decade high of 0.75%
Given the economic outlook, productivity gaps, strength of the pound and Brexit uncertainty I see this as a short term decision if not possibly one that will be undone later on down the road.
The 0.25% base rate increase will add £208.33 a month to the expenses of landlords for every £1 million of interest only tracker rate mortgages. Given that private landlords are being targeted with Section 24 restrictions on finance cost relief, this could hurt.
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The summary of the MPC decision states:
“Since the May Inflation Report, the near-term outlook has evolved broadly in line with the MPC’s expectations. Recent data appear to confirm that the dip in output in the first quarter was temporary, with momentum recovering in the second quarter. The labour market has continued to tighten and unit labour cost growth has firmed.
The MPC’s updated projections for inflation and activity are set out in the August Inflation Report and are broadly similar to its projections in May.
In the MPC’s central forecast, conditioned on the gently rising path of Bank Rate implied by current market yields, GDP is expected to grow by around 1¾% per year on average over the forecast period. Global demand grows above its estimated potential rate and financial conditions remain accommodative, although both are somewhat less supportive of UK activity over the forecast period. Net trade and business investment continue to support UK activity, while consumption grows in line with the subdued pace of real incomes.
Although modest by historical standards, the projected pace of GDP growth over the forecast is slightly faster than the diminished rate of supply growth, which averages around 1½% per year. The MPC continues to judge that the UK economy currently has a very limited degree of slack. Unemployment is low and is projected to fall a little further. In the MPC’s central projection, therefore, a small margin of excess demand emerges by late 2019 and builds thereafter, feeding through into higher growth in domestic costs than has been seen over recent years.
CPI inflation was 2.4% in June, pushed above the 2% target by external cost pressures resulting from the effects of sterling’s past depreciation and higher energy prices. The contribution of external pressures is projected to ease over the forecast period while the contribution of domestic cost pressures is expected to rise. Taking these influences together, and conditioned on the gently rising path of Bank Rate implied by current market yields, CPI inflation remains slightly above 2% through most of the forecast period, reaching the target in the third year.
The MPC continues to recognise that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal.
The Committee judges that an increase in Bank Rate of 0.25 percentage points is warranted at this meeting.
The Committee also judges that, were the economy to continue to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon. Any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.”
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