Log inInterest Rate Decisions Update
The US Federal Reserve keeps interest rates unchanged, whilst the Bank of England acts to raise rates.
Yesterday the US Federal Reserve reacted as expected and voted to keep US interest rates unchanged.
The Fed said economic activity is rising at a “strong” rate, compared to a “solid” rate in June. This acknowledges the recent 4.1% GDP print for the second quarter – the highest since 2014. Despite this, the Fed did not feel compelled to bring forward the timing of the next interest rate rise, which has been guided for September.
The Fed’s meeting statement suggested it remained on course for a September rate rise, which could be the third of the four rate rises it has pencilled in for 2018, which highlights the strength of the US economy.
In a widely telegraphed move, the Bank of England’s Monetary Policy Committee (MPC) voted to raise the interest rate from 0.5% to 0.75% at their August meeting.
The MPC sighted there was limited slack in the UK economy and a tightening labour market.
More surprisingly the decision was unanimous with all nine members of the MPC voting for the increase. It was anticipated that a 7-2 split was the mostly likely outcome, with Jon Cunliffe and Dave Ramsden expected to vote to keep rates where they are, but this did not play out.
The Bank raised the UK GDP forecast for 2019 to 1.8%, with the GDP forecast for 2020 at 1.7%.
This is the first time the Bank rate has been above 0.5% since March 2009, where rates were slashed following the onset of the global recession.
Whilst this will provide a slight relief to savers, who should see marginally higher interest rates on savings, the cost of an average tracker mortgage of £150,000 will increase by approximately £20 per month.
Whilst many economists and market participants had been calling for the Bank to raise interest rates, The British Chamber of Commerce (BCC) called the decision ‘ill-judged’.
“The decision to raise interest rates, while expected, looks ill-judged against a backdrop of a sluggish economy. While a quarter point rise may have a limited long-term financial impact on most businesses, it risks undermining confidence at a time of significant political and economic uncertainty,” said Suren Thiru, Head of Economics at BCC.
“The increase reinforces a concerning aspect of the Bank of England’s recent approach to monetary policy, which appears to be overly focused on reinforcing an idealised direction for rates, rather than on economic reality – an approach that unnecessarily risks UK’s growth prospects.”
The value of sterling against the US dollar and euro remained relatively unchanged, as did Gilt yields, as financial markets had already priced the probability of the rate rise at 90% and the Bank’s decision merely confirmed expectations.