Bank of England in shock interest rate increase

The Bank of England’s monetary policy review committee managed to pull a rabbit out of the hat this afternoon. In a move that most had discounted, the MPC announced at noon that for the first time in eleven months it would increase interest rates in the UK to 4.75 percent.

Whilst the MPC has been generally ‘soft’ on interest rates over the past few years, nevertheless, world markets and economics may have forced the hand this time. Globally interest rates are on the up, with even the Bank of Japan increasing rates last month. The EBC and the Fed are also expected to increase rates today and next week respectively.

The increase should also have been expected as fears of inflation (up to 2.5% in June) in the UK are growing due to a number of factors. The most obvious one at the moment being the massive increases in the costs of energy, both oil and gas – and the knock on effect that has.

At the same time, the banks and building societies are expected to increase the cost of borrowing later this afternoon. This will hit many householders badly as prices were starting to rise again. The cost of mortgages will probably go up by 0.3 to 0.35 percent if previous reactions are anything to go by.

Its likely that this will be the last raise for some time, depending on factors over the next few months. If anything, one more rise is likely to come in October/November timeframe. Though the major effects of the Fed and BoJ will more likely be the determinants.

The Business News Source thinks this is a good move by the MPC, moving interest rates up at this point will certainly cool spending and hopefully will send a clear signal to the housing market.