News Worms
News Worms

Sterling FALLS ahead of BOE interest rate meeting

Sterling FALLS ahead of BOE interest rate meeting

The Bank of England's decision to raise interest rates is the first hike since July 2007, when Gordon Brown had just taken over as Prime Minister from Tony Blair.

The latest Reuters poll strongly supported the view that the BoE will raise base rates to the 0.5 percent they stood at from March 2009 until August previous year, when they were halved to 0.25 percent after Britons voted to leave the European Union. All members agree that any future increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.

The weak pound since last year's Brexit referendum has ramped up the cost of goods imported into Britain, and therefore consumer prices.

A quarter-point rise will only take rates back to where they were before the last cut in August 2016, meaning that any impact is expected to be modest.

Today's rate hike-from 0.25% to 0.5%-does little more than reverse the cut in August 2016, in the immediate aftermath of the European Union referendum that officials feared would lead to a recession.

The BoE did not, however, alter its quantitative easing, or cash stimulus, policy, which it first embarked upon to encourage commercial lending after the financial crisis.

The Bank is looking to cool surging inflation, which has been sent higher by sharp falls in the pound since the Brexit vote.

From January, the Frankfurt institution will reduce its purchases of government and corporate bonds to €30 billion a month, from €60 billion at present.

The Bank's decision is expected to be announced during BoE Governor Mark Carney's address at 1230 GMT and it will be preceded by the results of a monthly survey of the British construction sector, expected at 0930 GMT, which could give some indication of the economic mood and the likelihood of a longer-term tightening cycle. However, he specified that the independent variable for that policy will be Brexit negotiations.

The immediate effect of a rates increase is on the disposable income of households.

United Kingdom bond and rates markets reflected traders' skepticism that rates will rise much more in the coming years.

Opinion is split, however, on whether the hike is a one-off or a sign of things to come.

Now, the fear is that inflation, stoked by the pound's sharp depreciation since the referendum, is running too far ahead of the central bank's 2% target. He explained that an increase of 0.25% on a £150,000 standard variable mortgage at 4.5% over 25 years would see payments rise by more than £20 per month.

'We assume that the MPC will raise rates slowly over the next two years, assuming a Brexit deal is visible by the middle of 2018, unemployment remains low and global growth holds up. JLL predicts that there will be steady, small rises up to 2.25% in its new property market forecast report.


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