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Bank of England hikes interest rates by 0.25 pct
05 November 2017, 02:18 | Gordon Grant
LIVE The current exchange rate is €1.13507 to the pound
The Bank of England has voted to increase United Kingdom interest rates for the first time in more than a decade.
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 a year ago, when they were halved to 0.25 percent after Britons voted to leave the European Union.
It is likely to be the first of a number of rises over the next five years with forecasts indicating it could reach 2.25% by 2022. That's more than markets are now expecting and more than the institute forecast in August.
The pound tumbled in an immediate reaction to the rate move, while the London stock market extended earlier gains as a weaker sterling helped the earnings prospects of exporters. However, he specified that the independent variable for that policy will be Brexit negotiations.
The panel which sets interest rates, called the Monetary Policy Committee (MPC), justified the rate increase by pointing to record-low unemployment, rising inflation and stronger global economic growth.
Generally, higher interest rates encourage saving by raising the incentive to put money in the bank. Despite historically low unemployment, real wages in the United Kingdom are decreasing.
There are some 3.7m households on a standard variable rate or tracker mortgage, so their monthly bills are likely to increase.
'Those on fixed rate deals are safe for the time being but when the term comes to an end new fixed deals could be more expensive.
The bank says it only expects interest rates to rise gradually over the next three years.
'What it does is reverse the post-referendum cut from 15 months ago, which, with activity broadly holding up, may have been an unnecessary safety net, ' he added.
Mortgage lenders are now expected to follow suit with small increases to their lending rates.
The first of these rate increases isn't fully priced in until November/December next year, and the second one not until 2020. The direction of travel for interest rates will have a bearing on future plans.
Rates have simply gone back to a level that itself was an all-time low for the best part of a decade, Mark Posniak, managing director of Octane Capital, pointed out.
According to Steven Cook, co-founder of the structured property finance team at Investec, many institutional investors will welcome the increase in the bank rate as an attempt to control inflation, now at 3 percent, in order to achieve the government's target of 2 percent by the end of its forecast period. Arguably the real challenge comes not with the first rate rise we have now had but the one after that, ' he added. While it might give some prospective buyers pause for thought, it could actually cause others to act and take the initiative before rates potentially rise further.
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