BofE Base Rate increased 0.25%

by Neil Patterson

6 months ago

BofE Base Rate increased 0.25%

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BofE Base Rate increased 0.25%

The Bank of England has increased the Base Rate for the first time since July 2007 from 0.25% to 0.5%.

Despite modest economic figures and a cut in projected growth rates the current 3% inflation rate was apparently too much to ignore against the 2% medium term target.

The Monetary Policy summary press release said:

“The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 1 November 2017, the MPC voted by a majority of 7-2 to increase Bank Rate by 0.25 percentage points, to 0.5%. The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.

The MPC’s outlook for inflation and activity in the November Inflation Report is broadly similar to its projections in August. In the MPC’s central forecast, conditioned on the gently rising path of Bank Rate implied by current market yields, GDP grows modestly over the next few years at a pace just above its reduced rate of potential. Consumption growth remains sluggish in the near term before rising, in line with household incomes. Net trade is bolstered by the strong global expansion and the past depreciation of sterling. Business investment is being affected by uncertainties around Brexit, but it continues to grow at a moderate pace, supported by strong global demand, high rates of profitability, the low cost of capital and limited spare capacity.

CPI inflation rose to 3.0% in September. The MPC still expects inflation to peak above 3.0% in October, as the past depreciation of sterling and recent increases in energy prices continue to pass through to consumer prices. The effects of rising import prices on inflation diminish over the next few years, and domestic inflationary pressures gradually pick up as spare capacity is absorbed and wage growth recovers. On balance, inflation is expected to fall back over the next year and, conditioned on the gently rising path of Bank Rate implied by current market yields, to approach the 2% target by the end of the forecast period.

As in previous Reports, the MPC’s projections are conditioned on the average of a range of possible outcomes for the United Kingdom’s eventual trading relationship with the European Union. The projections also assume that, in the interim, households and companies base their decisions on the expectation of a smooth adjustment to that new trading relationship.

The decision to leave the European Union is having a noticeable impact on the economic outlook. The overshoot of inflation throughout the forecast predominantly reflects the effects on import prices of the referendum-related fall in sterling. Uncertainties associated with Brexit are weighing on domestic activity, which has slowed even as global growth has risen significantly. And Brexit-related constraints on investment and labour supply appear to be reinforcing the marked slowdown that has been increasingly evident in recent years in the rate at which the economy can grow without generating inflationary pressures.

Monetary policy cannot prevent either the necessary real adjustment as the United Kingdom moves towards its new international trading arrangements or the weaker real income growth that is likely to accompany that adjustment over the next few years. It can, however, support the economy during the adjustment process. The MPC’s remit specifies that, in such exceptional circumstances, the Committee must balance any trade-off between the speed at which it intends to return inflation sustainably to the target and the support that monetary policy provides to jobs and activity.

The steady erosion of slack has reduced the degree to which it is appropriate for the MPC to accommodate an extended period of inflation above the target. Unemployment has fallen to a 42-year low and the MPC judges that the level of remaining slack is limited. The global economy is growing strongly, domestic financial conditions are highly accommodative and consumer confidence has remained resilient. In line with the framework set out at the time of the referendum, the MPC now judges it appropriate to tighten modestly the stance of monetary policy in order to return inflation sustainably to the target. Accordingly, the Committee voted by 7-2 to raise Bank Rate by 0.25 percentage points, to 0.5%. Monetary policy continues to provide significant support to jobs and activity in the current exceptional circumstances. All members agree that any future increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.

There remain considerable risks to the outlook, which include the response of households, businesses and financial markets to developments related to the process of EU withdrawal. The MPC will respond to developments as they occur insofar as they affect the behaviour of households and businesses, and the outlook for inflation. The Committee will monitor closely the incoming evidence on these and other developments, including the impact of today’s increase in Bank Rate, and stands ready to respond to changes in the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target.”

Comments

Gary Dully

6 months ago

Time to get the Section 24 spreadsheet out again and a bunch of Section 13 notices.

steve p

6 months ago

Reply to the comment left by Gary Dully at 02/11/2017 - 12:44
It was only a year ago they lowered rates from 0.5% to 0.25%, im guessing you didn't lower rents then, although the section 24 does magnify any rate rises I don't think its a game changer.

Ive always based rates on 5% as that is more the norm, anything lower I pay off the mortgages off, I would expect most landlords should expect rates to continue to rise. Obviously if you have tenants in that are paying well below market rates there may be some room to up rents but dont forget it costs a lot to have an empty property so make sure you don't have a knee jerk reaction and throw out the baby with the bath water.

Richard U

6 months ago

Paying the mortgage off? if you got some spare pennies you are happy to give to the taxman, i can help you out!

Agree that I don't think it's worth unsettling tenants for small changes in costs. 🙂

Even if interest rates went up to 100%,I would not be able to increase my tenants rent as he is my cousin,his Mother & Father are my agents.His rent is fixed at a low rent well below market rates.

steve p

6 months ago

Reply to the comment left by Richard U at 02/11/2017 - 13:09
In the short term yes ill pay more tax but I have an end game in 5yrs time retiring at age of 40 and living off the income of the properties which will drastically reduce my tax bill.

So in the short term the tax man will get a win but in the long run it will cost them way more...

Sami Houmrani

6 months ago

Reply to the comment left by Gary Dully at 02/11/2017 - 12:44
Well said Gary 😊

Reply to the comment left by steve p at 02/11/2017 - 13:31
That is also my plan.My only concern is what affect will having lost a salary have on securing mortgage deals.I could retire now and my company pension would start in four years,so in the meantime my only income would be rental income.I did recently pay off my own mortgage.so the temptation to retire is strong to say the least

Monty Bodkin

6 months ago

Reply to the comment left by Gary Dully at 02/11/2017 - 12:44
You've got that right Gary.

The days of not putting up rents for existing tenants are over.

Voids are nothing to be feared of in the current market for landlords with a decent spread of properties.

Consider the total cost and inconvenience for a tenant to move to a similar property- if they can find one.

Old skool rules used to be 2 months void a year, I'm currently on less than 2 days void a year.

Regular rent reviews and staggered rent increases are the way ahead for portfolio landlords.


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