tutor2u | Why the Bank of England has raised interest rates

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Why the Bank of England has raised interest rates

Geoff Riley

2nd November 2017

Inevitably there has been a deluge of media coverage of the first base rate rise for a decade - albeit a tiny step! Here is our curation of some of the best articles.

The Bank of England MPC voted by a majority of 7-2 to raise Bank Rate by 25 basis points to 0.50%.

When setting interest rates, the MPC considers many factors including debt, savings, inflation, economic growth, employment and wages. They’ll also look at conditions in economies and financial markets worldwide.

Reaction in the currency market to the interest rate news is tracked below - sterling dropped against the US dollar after an initial spike. In part this is because Carney's comments at the Inflation Report press conference suggested that further interest rate increases maybe some months away. 

The FT describes the process of a gradual return to normalisation of interest rates as a "slow-burner".

The Bank of England estimates that the trend growth rate for the UK economy has fallen - in part because Brexit is likely to have a negative supply-side impact on productive potential. 

Most of the increase in long run aggregate supply in recent years has flowed from an expanding labour supply (helped by strong net inward migration) rather than improvements in productivity and investment.

A persistently low rate of capital investment measured as a share of GDP is also a factor behind a declining trend rate of growth of real GDP

Some charts I posted on twitter related to the rise in interest rates

Who will be affected most by an interest rate increase? Tim Harford is struck by the fact that fewer than 25% of UK households have a mortgage.

But ex-MPC member Danny Blanchflower remains highly critical of monetary tightening by the Bank of England.

And finally .... Baffled by UK finance? 10-year-olds explain!

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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