A UK interest rate hike has been on the cards for quite some time, but the Monetary Policy Committee of the Bank of England always found a compelling reason to defer it. That reluctance came to an end on Thursday when they agreed to a 0.25% hike to the interest rate. This took UK interest rates to their highest level since March 2009 when they were cut from 1% to 0.5% - at that time, an historic low. In the wake of the Brexit referendum, rates were shaved to 0.25% and remained there between August 2016 and November last year. The long-term average for the UK interest rate stands at 7.58% (1971-2018) with a low of 0.25% (August 2016) and a high of 17% (November 1979).
Market reaction to the change has been muted given the rising concern about a “no deal” Brexit and the fact that many investors had already priced it into their calculations. It has continued to lose ground against other major currencies since the hike.
Given the magnitude of the increase and the very low base value for interest rates, the change is likely to have only a marginal effect on businesses, making borrowing fractionally more costly (lenders are not obliged to increase rates or to limit any increases to the BoE hike, of course). It will make the mortgage costs dearer for the 3.5 million households on “tracker” mortgages and will marginally boost interest payable on deposit accounts. On a mortgage of £300000, the rise will push the annual costs up by £448. The UK inflation rate stands at 2.4%, so typical interest on deposit accounts currently lags well below inflation.
Mark Carney commented on the rise: “There are a variety of scenarios that can happen with Brexit … but in many of those scenarios interest rates should be at least at these levels and so this decision is consistent with that. In those scenarios where the interest rate should be lower, well then the MPC which meets eight times a year would, I'm confident, take the right decision to adjust interest rates at that time."