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Interest Rates Rise

In what was a somewhat unexpected move, the Monetary Policy Committee (MPC) of the Bank of England voted for a quarter point rise in interest rates during this month’s meeting, pushing the base rate up to 4.75%.

The decision was taken by the committee in order to ease inflationary pressures, as the consumer price index (CPI) had been running at a level of 2.5% - significantly above the 2% target and therefore it meant the MPC had to step in and take action to check it’s growth before it got beyond reasonable limits – if it should rise to 3.1% then the Bank’s treasurer Mervyn King is required to write to the Chancellor of the Exchequer in order to explain things.

Before the decision was announced, most analysts believed that the Bank would continue with a ‘wait and see’ approach and keep rates unchanged, what with increases in energy costs and the spending slowdown that is expected post world cup. There expectations weren’t shared by the seven MPC members however, who felt that inflation was going to continue to grow unless rates were increased in order to rein them in.

This move is of course designed to kerb consumer spending to a certain degree, in order to reduce inflation in the CPI, by increasing the interest rates there is a two-way impact on consumers. The first of these is that it makes mortgages and loans more expensive, and so people are more likely to tighten the purse strings as the repayments rise. Secondly, with higher interest rates there is more of an incentive to save, as the money will grow at an increased rate.

Before this move was taken the general consensus was that a rate rise was needed before the end of the year, with most expecting that rise to come in the final quarter. Since this earlier than expected rise, and following comments made by Mr King and reports from the Bank, it is now believed by many analysts that we will see a further quarter point raise before year’s end, taking the rate to five percent.

There is much speculation around at present regarding what future interest rates will hold, but the truth is that trying to second guess the MPC’s decisions is a tough task – very few economists predicted this months rise, current best guesses are that we are in an ‘increase’ phase of the rate cycle, and that further small increases should be expected.