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Bank of England warns interest rates set to rise sooner and faster

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Written by: Lana Clements
08/02/2018
The Bank of England said interest rates will need to rise faster and sooner than previously projected, with the next increase now expected in May.

Monetary policymakers unanimously voted to hold the Base Rate at 0.5% in February but used the latest inflation report and update to warn the next hike will come earlier than thought last year, if the economy continues on its current path.

It comes after economic growth jumped by 0.5% in the final three months of 2017, while inflation is at 3% – one per cent higher than the Bank’s target of 2%.

The Bank’s Monetary Policy Committee (MPC) has now revised up its forecasts for growth in 2018, 2019 and 2020.

Stronger wage growth has also been predicted – and inflation is expected to remain high.

In a statement the Bank said: “The Committee judges that, were the economy to evolve broadly in line with the February inflation report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report, in order to return inflation sustainably to the target.”

Next rate rise expected in May

The Bank hiked interest rates for the first time in a decade in November last year and said further increases would be gradual with markets at that time expecting the next rise in the second half of 2018.

But it now looks as though the first of two, or three hikes, could come in the first half of this year.

Paul Hollingsworth, senior UK economist at Capital Economics, said: “Today’s releases pave the way for an interest rate hike in May, and we think that the MPC will hike a further two times this year, taking Bank Rate to 1.25%.”

Ben Brettell, senior economist at Hargreaves Lansdown, added: “It now looks like the next rise could happen as soon as May – the next time the Bank’s economic forecasts are due to be updated.

“On the subject of Brexit, the Bank sounded a note of caution, saying it remained the key source of uncertainty.

“Future decisions on interest rates will therefore depend heavily on progress in negotiations with the EU.”

The pound jumped at the prospect of higher interest rates.

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