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Interest rates held but inflation set to overshoot 2% target in 2017

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Written by: Paloma Kubiak
15/12/2016
Interest rates were held at their historic low of 0.25% but the Bank of England said it expects inflation to reach its 2% target within six months.

The Monetary Policy Committee (MPC) voted unanimously to maintain the Bank of England Base Rate at the unprecedented low of 0.25%, after cutting the rate from 0.5% in August.

It also confirmed it will continue with the programme to purchase £60bn of additional government bonds, extending its asset purchases to £435bn as well as its scheme of buying up corporate bonds totalling £10bn.

Minutes from the meeting held last night stated that based on the November inflation report, household real income growth would slow and weaken household spending, while business activity could also be restrained because of UK firms reduced access to European Union markets.

It expected the unemployment rate to rise to about 5.5% by the middle of 2018 and to stay at that level throughout 2019.

Owing to the depreciation of sterling, CPI inflation was expected to rise to 2.75% in 2018 before falling in 2019 to about 2.5% in three years’ time.

However since then, the committee said the global outlook for the economy has become more fragile, with risks coming from China, the euro area and some emerging markets. Domestically, it believes there will be some slowing in activity during 2017, but the extent will be based on how resilient household spending is to the pressure of rising inflation.

While this week’s inflation figure for November stood at 1.2%, the MPC said it expects inflation to rise to its 2% target within six months though it’s “likely to overshoot the target later in 2017 and through 2018”. This is due to sterling’s trade-weighted exchange rate appreciating by over 6% and a 14% rise in dollar oil prices.

‘Disaster’ for savers but good news for mortgage holders

Richard Theo, CEO and co-founder of online investment firm Wealthify, said the deadly duo of low interest rates and rising inflation spells disaster for UK savers.

“Savings in the UK are draining away. Inflation now heavily exceeds savings returns and this toxic combination is threatening to wipe out around £6bn of the UK’s £700bn cash savings pot each year. Unless savers act now to find alternative ways to grow their money – they will continue to watch their hard-earned cash disappear into an inflation black-hole.

“Now is the time to act. Brits need to shake off their switching lethargy and search for alternatives to archaic cash savings accounts. People spend hours hunting for bargains, especially at Christmas, why don’t we do the same when it comes to making sure we get the best return on our savings?”

Ishaan Malhi, CEO and founder of online mortgage broker Trussle, said mortgage rates have been at record lows so today’s announcement is good news for those looking to buy a home or switch their current mortgage to a new low-rate deal.

“However, lenders and brokers must do more to keep homeowners informed about opportunities like this; according to our research just one in 20 mortgage holders have thought about taking advantage of these low rates since the Bank of England’s action.

“As modern habits and expectations change, we’re seeing more people turn to online brokers that have innovative methods of monitoring their mortgage and informing them when it’s the right time to switch to a better deal. Lenders and traditional brokers need keep up with the times if homeowners are to make the most of these historically low rates.”

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