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Base rate unlikely to rise again this year

Base rate unlikely to rise again this year

Today’s rise in UK interest rates from the Bank of England is likely to be a one off event, with little prospect of more rate rises to come in the near future, industry figures have said.

Earlier today (2 August) the nine person Monetary Policy Committee, which is chaired by the Bank's governor Mark Carney, voted unanimously to raise the base rate to 0.75 per cent, its highest level since the financial crisis.

In his press conference accompanying the bank’s quarterly inflation report, Mr Carney repeated his long stated view that any rises in UK interest rates from here on are likely to be "gradual" and that rates will peak at a lower level this time than they have in the past.

Neil Birrell, chief investment officer at Premier, said the fact all nine members of the committee voted to put rates up, and the emphasis that more rate rises will be needed in future, may prompt market participants to position for higher rates in the near term.

But he added: "It’s hard to see rates rising quickly given the mixed economic backdrop and Brexit uncertainty."

Stewart Robertson, senior economist at Aviva Investors, said while a modest rate rise like today’s should not negatively impact the economy, it was not entirely clear that a hike was merited in today’s circumstances.

Any further increases should not be necessary either, he said.

He added: "The Bank needs to tread cautiously from here and will be monitoring any impact of today’s decision very carefully."

Rob Morgan, pensions and investment analyst at Charles Stanley Direct, also said he did not expect the base rate to rise much further.

"Given the current level of uncertainty facing the UK economy any significant rises could make borrowing more expensive and slow the economy down too much," he said.

In the quarterly inflation report from the bank, governor Mark Carney said the long-term normal rate of GDP growth in the UK is now 1.5 per cent annually, down from the previous 2 per cent.

In any scenario, according to the Bank of England, where GDP growth is higher than that, inflation will be rising and the Bank of England will need to put interest rates up.

But Peter Elston, chief investment officer at Seneca, has been positioning the portfolios he manages in preparation for higher UK interest rates.

He cited data from the International Monetary Fund (IMF) which shows that the UK has a "positive output gap" which means it is presently running at above that 1.5 per cent level where rates will rise.

He didn’t express a view on the timing of rate rises, but said the "direction of travel" was clear.

Melanie Baker, senior economist at Royal London, agreed periodic interest rate rises will be "normal" in the years ahead.

But Ed Smith, head of asset allocation research at Rathbones, called the decision to put interest rates up a "bet" by the Bank that the outcome will be an orderly Brexit and therefore have a relatively muted impact on the short-term economy.