In the News
Why the Bank of England has raised interest rates
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 interest rate hasn’t risen since July 2007, and fell to a record low during the recession https://t.co/7iDdBmzw60 pic.twitter.com/qHxjKDuZHP
— Office for National Statistics (ONS) (@ONS) November 2, 2017
The Bank of England MPC voted by a majority of 7-2 to raise Bank Rate by 25 basis points to 0.50%.
Why the Bank of England has raised interest rates https://t.co/aQIjH7nHsa
— Sky News (@SkyNews) November 2, 2017
The Bank of England blames Brexit, for above-target inflation, below-trend growth and the necessity to raise interest rates pic.twitter.com/KD75gCrwLD
— Robert Peston (@Peston) November 2, 2017
My take: Today's rate rise doesn't imply further rises due to #Brexit so "BoE could have delayed interest rate rise" https://t.co/sKeIOm5im6
— Linda Yueh (@lindayueh) November 2, 2017
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.
We have raised interest rates to 0.50% - find out more at https://t.co/t3kXo2DpBQ #InflationReport pic.twitter.com/xOPSF2wMdI
— Bank of England (@bankofengland) November 2, 2017
Mark Carney at the #InflationReport press conference. Watch live: https://t.co/ofjROBZ0GV pic.twitter.com/xuHJLEdMWJ
— Bank of England (@bankofengland) November 2, 2017
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".
Here's how the pound reacted to the Bank of England's decision to raise rates for the first time in a decade https://t.co/IOfMKAns5x pic.twitter.com/Z6hPm7QpVH
— Financial Times (@FT) November 2, 2017
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.
First time the BoE has published a Potential output estimate
— Chris Giles (@ChrisGiles_) November 2, 2017
1.5% a year
That's really much weaker than consensus
Bank of England making it very clear that “almost all” economic growth over past decade because of “increase in labour supply.” #FoM pic.twitter.com/jrJtqFnr4V
— Ciaran Jenkins (@C4Ciaran) November 2, 2017
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
Low Investment is one of the reasons that the UK has had low productivity & a lower potential growth rate of 1.5% according to the BOE today https://t.co/HpFreBhtzk
— Linda Yueh (@lindayueh) November 2, 2017
Some charts I posted on twitter related to the rise in interest rates
Background to rate rise: Around one fifth of companies have profit below their annual interest payments - fairly stable in recent years pic.twitter.com/aMq6Xu1bSN
— Tutor2u Geoff (FRSA) (@tutor2uGeoff) November 2, 2017
Background to the rate rise - continued strong growth of consumer credit - Dealership car finance contributes 1/3rd of this growth pic.twitter.com/KRIWKqXiiR
— Tutor2u Geoff (FRSA) (@tutor2uGeoff) November 2, 2017
Background to the rate rise - just under 60% of mortgages are on a fixed rate. pic.twitter.com/bqmL1rKAyu
— Tutor2u Geoff (FRSA) (@tutor2uGeoff) November 2, 2017
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.
best can be said of the 25b rise today is it won't do as much harm as a 50bp or 75bp rise to an already slowing economy = v poor thinking!
— Professor Danny Blanchflower economist & fisherman (@D_Blanchflower) November 2, 2017
And finally .... Baffled by UK finance? 10-year-olds explain!
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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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