UK Interest Rate Hiked For The First Time In A Decade

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The Bank of England has raised the official interest rate by 0.25% to 0.50% – the first increase for more than a decade.

The bank’s monetary policy committee voted 7-2 to increase the rate.

The rate rise will send panic around the mortgage and credit markets for consumers as although the increase is modest, the rate is effectively doubled.

Savers are unlikely to reap any real benefit, but lenders will be quick to ratchet up mortgage, loan and overdraft rates.

The Bank of England explains the rate had to rise because of inflationary pressures.

Why the rate increased

“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,” said a statement from the bank.

“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.”

The statement also argued the bank could not stop the economy adjusting to Brexit and new trading agreements in the coming years, but can offer support.

“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,” it said.

Risks to the UK economy

“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.

“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 UK interest rate has not increased since November 2007. The last move was following the Brexit referendum in June 2016, when the bank cut the rate from 0.5% to 0.25%.

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