The Bank of England’s MPC has voted unanimously to maintain the Bank Rate at 0.5%.
The Committee also voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10bn. Furthermore, it voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435bn.
“GDP growth is expected to average around 1¾% over the forecast, a slightly faster pace than was projected in November despite the updated projections being conditioned on the higher market-implied path for interest rates and stronger exchange rate prevailing in financial markets at the time of the forecast,” the BoE said.
“While modest by historical standards, that rate of growth is still expected to exceed the diminished rate of supply growth. Following its annual assessment of the supply side of the economy, the MPC judges that the UK economy has only a very limited degree of slack and that its supply capacity will grow only modestly over the forecast, averaging around 1½% per year. This reflects lower growth in labour supply and rates of productivity growth that are around half of their pre-crisis average. As growth in demand outpaces that of supply, a small margin of excess demand emerges by early 2020 and builds thereafter.”
CPI inflation fell from 3.1% in November to 3.0% in December. Inflation is expected to remain around 3% in the short term, reflecting recent higher oil prices.
Xafinity Punter Southall Investment Consulting, investment consultant, Nick Harvey commented: “Today’s decision to maintain the Bank Base Rate at 0.5% was not a surprise, not least after the wobbles in markets earlier this week and the previous comments from the MPC that any further rises would be at a gradual pace and to a limited extent.
“At the moment, November’s upward move in Bank Base Rate does not feel like it was a turning point in interest rates, and in any case defined benefit pension scheme stakeholders will be conscious that increases in Bank Base Rate in isolation do not necessarily directly lead to increases in long term gilt yields and so may not have a material positive impact on funding issues.
“The flip side of interest rate rises for defined benefit scheme members is that should they increase by more than expected, the record high transfer values that we have seen are likely to come to an end. Pension transfer values as measured by the Xafinity Transfer Value Index remained high during 2017, fluctuating throughout the year but ending the year at £236,000, little changed from the figure of £234,000 at the end of 2016. These figures were relatively high compared to the Index at the end of 2015, which was £203,000.”
Commenting on the impact on mortgages, Trussle CEO and founder Ishaan Malhi said: “We may not see another interest rate rise for a few months, but it’s looking like it won’t be long before mortgage rates begin to climb. Low interest rates and government subsidies have encouraged banks to lend, but the days of cheap credit could be numbered. The Term Funding Scheme, which has propped up lending to the tune of £100bn in the last 18 months, comes to an end this February and may well have a knock-on effect on mortgage rates.
“For hopeful first-time buyers and existing homeowners looking to switch mortgage, using this window of time to lock in a low fixed rate deal could prove a wise move which could save thousands of pounds in the long term.
“It’s important to remember though that headlines rates are not the be all and end all. They can often be a red herring, which distract people from the true cost of the mortgage, once all charges and incentives are considered.”
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