Bank Rate held, for now

Bank Rate on hold, for now

The MPC voted 7-2 in favour of maintaining Bank Rate at 0.1% on Thursday.

However, expect rises in the future

The Monetary Policy Committee did say that:

We expect interest rates will need to rise modestly to return inflation to our 2% target

When the Covid pandemic struck, we needed to take immediate and substantial action to meet our inflation target.

That action included a cut in interest rates to 0.1% in March 2020.

The outlook has now changed.
The UK economy is recovering, unemployment has fallen, and we expect inflation to rise further to around 5% by spring next year.

We now expect interest rates will need to rise modestly to return inflation to our 2% target.

By making sure that inflation returns to target we are continuing to support people’s jobs and incomes, and helping the UK economy grow.

Twindig take

With rising living costs and the changes announced in last week's Spending Review, a rise in Bank Rate would have added salt to the wounds and we understand why the Monetary Policy Committee was so in favour of keeping Bank Rate in check.

However, a consequence of a recovering economy (a good thing) and rising wages (another good thing) is that positive moves in the economy can lead to increases in inflation (which can become a bad thing) and it seems likely that Bank Rate will rise in 2022 to keep inflation in check, in our view.

Many believe that a rising Bank Rate is bad for the housing market. We disagree, in particular, because in this case, it is a sign of an economic recovery and more than 80% of mortgaged households are on fixed-rate mortgages (so no immediate change) and around 17 million households are mortgage-free. Yes, changes in Bank Rate and therefore mortgage rates will impact the marginal buyer and the marginal buyer can move the market, but any move is unlikely to gain significant momentum whilst the economy is getting stronger rather than weaker, in our view.