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Rate rise will dampen business mood, but no need for panic

02 Nov 2017

Bank of England, Threadneedle StreetResponding to the Bank of England’s decision to raise interest rates from 0.25% to 0.5%, Tej Parikh, Senior Economist at the Institute of Directors, said:

“Rihanna’s ‘Umbrella’ was No.1 last time the Bank increased interest rates, but while today’s decision may dampen the mood of business, it’s a shower not a downpour and there’s no need to be reaching for the brollies just yet.

“With firms facing rising costs and consumers experiencing limited real wage growth, the resultant higher borrowing costs from today’s rise will pinch a little. But more important now is the Bank’s plan for the future path of interest rates, which will affect household expectations and business planning. Today’s increase was widely anticipated from the Monetary Policy Committee’s recent communications, and so serves to preserve the central bank’s credibility.

“Indeed, the MPC’s minutes articulated a cautious approach to future rate increases in tandem with smoothing the economy’s adjustment to a new trading relationship with the EU. While businesses support the intention, they will be looking for further guidance on what precisely the Bank expects to do next.

“What’s more, the Inflation Report published alongside today’s decision showed economic growth is expected to remain modest, while inflation is anticipated to fall back from recent highs. This only reinforces the need for on-going economic support from policymakers. Further rates rises should be avoided in the near term, while the Chancellor must use this month’s Budget to ease cost burdens and to incentivise investment across the business community.”

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