Bank of England expected to lift interest rates to 10-year high

The Bank of England is expected to hike interest rates tomorrow to their highest level for almost a decade tomorrow.

Mark Carney, Governor of the Bank of England. Picture: Phil Noble - WPA Pool/Getty Images

Members of nine-strong Monetary Policy Committee (MPC) are predicted to increase rates from 0.5 per cent to 0.75 per cent in what would mark only the second rise since the financial crisis struck, following last November’s quarter point hike.

The move would see rates reach their highest level since March 2009, when they were slashed from 1 per cent to the emergency low of 0.5 per cent in an effort to contain the fallout from the financial crisis.

Investec economist George Brown said he was “fairly confident” the Bank will move to raise rates and is pencilling in an 8-1 vote in favour, with Sir Jon Cunliffe the only dissenter.

Mr Brown said he believed the economy had performed in line with the bank’s last forecasts in May when it backed off from a widely anticipated hike to wait and see how the economy recovered after a weather-hit start to the year.

The bank also edged a step closer to pressing the button in June when its chief economist Andy Haldane joined two fellow policymakers in calling for a rise.

Howard Young at the EY Item Club said he believed the vote may be less definitive, given that inflation figures recently came in lower than expected – unchanged at 2.4 per cent in June – while wage growth has also been weak.

It has become an even closer call after survey figures today signalled a weaker performance from the manufacturing sector in July, according to Mr Archer, but he said this was “unlikely to deter” the MPC from raising rates.

He said: “We believe that the odds still favour the Bank of England lifting interest rate from 0.50 per cent to 0.75 per cent on Thursday after the August MPC meeting, most likely following a split vote.”

Mr Young added: “With interest rates down at 0.50 per cent, the Bank of England would clearly likely to gradually normalise monetary policy given that it is essentially an emergency low rate.

“Furthermore, inflation remains above target and the labour market looks relatively tight with the MPC considering that there is little slack left in the economy.”

The decision to raise rates would come as a blow to some borrowers on variable rate mortgages, but would offer relief to savers who have seen paltry returns on deposits since rates have languished at 0.5 per cent or below since 2009.

It is thought the bank’s latest set of forecasts in the accompanying inflation report will reinforce the case for a rise, with many economists expecting growth to have recovered to 0.4 per cent in the second quarter after slowing to 0.2 per cent in the previous three months.

The bank had already predicted in May this would be the case and its latest set of forecasts are set to confirm its outlook for the year ahead.

But the bank is likely to increase its inflation forecasts, with a weaker pound and higher oil and energy prices pushing up the outlook and further justifying the need for a rise.

The bank’s last move to raise rates in November from 0.25 per cent to 0.5 per cent was the first such move for more than ten years, but merely reversed the cut made in the aftermath of the Brexit vote.

Mr Brown believes if it does raise rates again tomorrow, it will be the only increase in 2018.

But he predicts a quarter point rise every six months until rates reach 1.5 per cent in 2020.

“We think the bank wants to raise rates in a gradual way and that would be consistent with the next one in February,” he said.