UK borrowing rates have risen to 0.50%, the first increase for more than a decade, in a decision which many analysts have warned may ultimately harm the increasingly fragile UK economy.
The Bank of England’s monetary policy committee voted for the 0.25% increase by a seven to two margin, more hawkish than a consensus predicted six/three split.
Market-implied rates had forecast the decision as a near certainty, on a 93.7% probability. That unanimity was reflected by Wealth Manager’s shadow MPC of nine discretionary managers, who recently voted by nine-to-one for a 0.25% rate rise.
The most recent change to borrowing costs was a 0.25% cut in August last year as policymakers responded to the shock of Brexit.
Following governor Mark Carney’s repeated warnings to borrowers that the cost of debt could soon increase many rate watchers had warned the perceived reliability of bank guidance was at stake.
‘Given market sentiment, it appears that Carney will have to follow through and raise rates in November to maintain credibility,’ noted Thomas Wells of the Smith & Williamson Short Dated bond fund in October, after UK consumer price inflation hit a five-year high of 3%.
That, and last month’s near double-digit climb in unsecured consumer debt over the past 12 months, with a rise of 9.9%, are likely to have painted the bank into a corner.
‘While recent comments from the MPC leave the timing of any hike open to question, a failure to follow through would open the MPC up to accusations of providing misleading signals,’ said Societe Generale’s chief UK economist Brian Hilliard, ahead of the meeting.
‘We are sure that governor Carney is sick of hearing himself referred to as an “unreliable boyfriend”, a phrase that would be certain to enjoy a resurgence if policy stays on hold.
He joined a growing chorus of voices cautioning that the current inflationary spike is likely to rapidly pass through and that the UK economy remained highly vulnerable to Brexit shocks, however.
‘We question whether the MPC will have the opportunity to push through further rate hikes. Our central scenario is that growth will slow fairly sharply in 2018 to just 0.8% as consumer spending is weighed down by negative real earnings and Brexit uncertainty finally hits business investment.
‘Lastly, policy lags mean hiking rates in 2H 2018 with Brexit looming in 1Q 2019 will be a considerable risk. This suggests that if there is an ambition to get rates to higher levels, then hikes should be delivered early in 2018, but this contradicts the “gradual pace” mantra.
‘So what looks likely is that the MPC will struggle to get a majority for a second hike this side of Brexit.’
While around 60% of British mortgages are fixed, many analysts have voiced concern that higher credit costs would add to the current squeeze on real incomes, which are already shrinking in real terms due to the squeeze of imported inflation.
Retail sales fell to the lowest rate of growth since 2013 in September. ‘Growth in consumers’ spending likely will be held back by slow growth in employment, further austerity and rising borrowing costs,’ said head of UK economics at Pantheon Macroeconomics Samuel Tombs.
‘Borrowing costs, meanwhile, will rise even even if the MPC holds off raising bank rate over the coming months, especially after the Term Funding Scheme is wound down in February. Most lenders also intend to restrict the supply of unsecured credit over the next three months.’
Backing away from an expected rate rise would have also put the skids back under sterling, which over the last year has climbed 8.2% versus a trade-weighted basket of global currencies.
Over the same period the pound has climbed 7.5% versus the USD and 2.3% versus the euro.