The Bank of England has signalled that it may hike interest rates in the “coming months” to cool surging inflation as economic growth shows signs of picking up.
Members of the Bank’s nine-strong monetary policy committee (MPC) voted 7-2 to keep interest rates on hold at 0.25 per cent, as widely expected.
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But the Bank gave its strongest signal yet that a rate hike is on the horizon as it said all policymakers believed “some withdrawal of monetary stimulus was likely to be appropriate over the coming months”.
It also reiterated that rates may need to rise by more than expected in financial markets.
Scottish Chambers of Commerce chief executive Liz Cameron said: “The circumstances currently being experienced by the UK are exceptional, and although the committee is clear that monetary policy is not unlimited in its ability to insulate the economy from economic shocks, it is right, in our opinion, that the interest rate was held at 0.25 per cent at this stage.
“With a rise in interest rates being considered at a more rapid pace than that currently expected by the markets, it is essential that the impact on wider business investment is fully considered before committing to any increase. Ultimately, business investment in skills and infrastructure is the only sustainable path to raise productivity, and ensure the rising profitability and wage increases needed to grow the economy.”
Ross Andrews, director of fixed-rate bond provider Minerva Lending, added: “In only a month the odds of a rate rise this year seem to have bounced back considerably.
“Savers continue to be teased. We know rates have got to go up at some point in the near future but Britain’s transition from a low interest rate environment, which has seen an entire generation grow up unable to earn anything other than paltry interest on savings, is taking an achingly long time.”
In minutes of its latest rates decision, the Bank said there was a “slightly stronger picture” for the economy since its forecasts last month thanks to signs of a firmer housing market, stronger employment and a rebound in retail and new car sales.
Meanwhile, Brexit-fuelled inflation is set to climb above 3 per cent in October – higher than the Bank previously expected.
It raised the prospect of a potential rate rise as soon as November, as it said it would “undertake a full assessment of recent developments” at the time of its next quarterly inflation report in two months.
Alan Wilson, active fixed income portfolio manager at State Street Global Advisors, said: “Contrary to market expectations, the MPC has stepped up its hawkish rhetoric at the September meeting. From today’s release, it is clear the committee has run out of patience with market-based rate expectations.”
Today’s minutes showed that while two MPC members – Ian McCafferty and Michael Saunders – repeated their call for an immediate rise to 0.5 per cent in the latest decision, the majority thought the outlook for growth was still unclear.
In the minutes, the Bank said: “While there had been some signs of growing momentum in activity into the second half of the year… it was too soon to judge whether stronger consumption growth would be sufficient to offset continuing weakness in business investment.
“It was also unclear how sustained any increase in gross domestic product growth might be over the medium term.”