Share Prices & Company Research


02 November 2017

First UK interest rate rise in 10 years

James Andrews, Director – Head of Investment Management, Redmayne-Bentley, comments after Bank of England raise interest rates.

“As expected, the Bank of England (BoE) raised interest rates by 25 basis points to 0.5%. What has caught some market participants by surprise is the fairly dovish tone of the announcement as the BoE removed from its statement any mention of rates rising faster than the market anticipates. The statement instead talked of only a couple more rate rises over the next three years. Furthermore, the BoE governor Mark Carney said in his press conference that the most likely reason to change rates further from here would be due to clarity on Brexit related issues, and that a move in the base rate could be in either direction.

“The Pound has fallen as a result, and Gilts have rallied in the face of this more dovish than expected tone.

“For me, this is not surprising given what Carney said back in June, when he talked of business investment and wages as being key drivers of the rate decision. If we look at these indicators, business investment rose just 2.5% during the second quarter of 2017 versus the same period last year. Strong business growth is deemed to be between 5% and 10%, which means the 2.5% growth we are seeing currently is pretty low. Furthermore, surveys of the construction industry show commercial building work has slowed as new orders are not replacing previous work, with the British construction sector now contracting.

“If we turn to wages, we see that real wages across the UK fell for the 6th straight month in August as wage growth continues to lag inflation. Data released on 18th October showed that basic wage growth was 2.1% during the 3 months to the end of August which was the same as the previous quarter, whilst inflation has hit a 5-year high of 3%.

“None of this points to a strong rationale for a period tightening and therefore the removal of the post-Brexit emergency cut of 0.25%, but nothing more any time soon feels like the correct course of action given the current numbers.

“As Carney has indicated, the next move is very much beholden to what comes next in terms of Brexit negotiations and the economic ramifications.”

First UK interest rate rise in 10 years
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