At its September meeting, the Bank of England’s Monetary Policy Committee (MPC) signalled that, if the economy evolves broadly in line with its expectations, an interest rate increase is likely in the months ahead. This would be the first increase in the Bank Rate since July 2007.
Clearly, much will depend on how the economy evolves, but most economists and financial market pricing suggest that a small rise of 0.25% is likely at the MPC’s next meeting in November, which would take Bank Rate to 0.5%.
We would expect a modest rise in Bank Rate, by itself, to have only a modest impact on economic activity. Indeed, if rates are raised to 0.5%, monetary policy settings will still be a little more supportive than they were before Bank Rate was lowered to 0.25% in August 2016.
This is because the MPC is unlikely to reverse the other measures it put in place last year to support credit availability in the wider economy (such as the additional purchases of government and corporate bonds, which have helped to keep longer term borrowing costs low). Moreover, the MPC has signalled that it expects any increase in interest rates to be gradual and limited. Indeed, financial market pricing suggests that Bank Rate is only likely to rise by around one percentage point (to 1.25%) over the next five years.