Interest rates could rise to 1 per cent in February as strong economic growth prompts the Bank of England to act before Britain exits the EU, economists are predicting.
Figures due out on Wednesday are expected to show the economy grew by 0.6 per cent between June and August. This was up from 0.4 per cent in the previous three months.
Amit Kara, chief UK forecaster at the NIESR think-tank, said he was confident growth would continue at least until the New Year – dipping only slightly if at all. That would pave the way for a rate rise from 0.75 per cent to 1 per cent, he said.
Bank of England: Interest rates could go up to 1% in February, economists are predicting
Assuming Premier Theresa May can strike a deal with the EU on the terms of Britain’s exit, the Bank of England would act just as the economy hits its potential, he added.
Britain is scheduled to leave the EU formally on March 29, 2019.
If policymakers increased interest rates ahead of that date and the economy subsequently started to struggle, it might give them more wriggle room to cut rates and stimulate economic activity.
Jay Mawji, managing director of Infinox, a City-based currency broker, agreed that a rate rise before March was ‘probable’ if Brexit negotiations went well.
Veteran City commentator David Buik said rates could rise even in a disorderly Brexit.
He said if a deal could not be struck then the pound would tumble and the cost of imports would rocket. In that scenario, the Bank of England would ‘reluctantly’ be forced to raise rates to bring inflation under control, he predicted.
Buik said he expected interest rates to rise in stages, reaching 1.25 per cent next year.
A rate rise should benefit savers but it would hurt homeowners and make it more expensive for businesses to borrow.
Brexit deal: Assuming Theresa May can strike a deal with the EU on the terms of Britain’s exit, the Bank of England would act just as the economy hits its potential
Base rate was cut to 0.25 per cent in August 2016, before being increased back to 0.5 per cent in November 2017 and then pushed up to 0.75 per cent in August.
If rates rise by another 0.25 percentage points, it would add about £200 a year to a £100,000 variable rate mortgage. About 3.5 million households have a tracker or variable mortgage and would face higher mortgage payments.
In theory, savers should receive more in interest. However, the last time rates rose, half of savings accounts saw no benefit.
Rising prices and wage inflation, record low unemployment and the pound’s weakness all point to interest rates rising again.
But some economists are less certain that rates would go up in the short term.
Yael Selfin, UK chief economist at accountancy giant KPMG, said she did not expect a rate rise for at least another year.
She said even if the pound slumps, the Bank of England would react by holding or cutting the base rate to kick-start the economy.
Tej Parikh, chief economist at the Institute of Directors, warned that a rate hike would be risky due to the uncertain political outlook.
Mike Schozer, of investment advisory firm Hadrian’s Wall Capital, warned that rising interest rates posed a threat to business.