At the last meeting of the Bank of England’s Monetary Policy Committee (MPC) earlier this month, it was agreed to keep Base Rate at 0.5 per cent, where it has sat for almost five-and-a-half years.
However, for the first time in three years the vote was split as two members of the nine-strong MPC voted to increase Base Rate by 0.25 per cent.
Most members of the MPC felt there was insufficient evidence of inflationary pressures to justify an immediate increase in Bank Rate. The Bank of England thinks that inflation is likely to remain a little below the 2 per cent target for the next couple of years, before reaching the target at the end of the three-year forecast period.
Another reason for not raising the Base Rate is that wage growth is still weak which risks increasing the vulnerability of households with large amounts of debt.
Nevertheless, Ian McCafferty and Martin Weale who voted for the rise felt that economic circumstances are sufficient to justify an immediate rise in Bank Rate. They believe that the continuing fall in unemployment will lead to a pick-up in wage growth.
Jeremy Duncombe, director at Legal & General Mortgage Club, commented: “For the first time in years we are seeing some members of the MPC voting to increase interest rates. This highlights that the discussion on a rate rise has moved from an ‘if’ to a ‘when’.
“Our latest Mortgage Mood survey shows that 68 per cent of homeowners think there is likely to be a rate rise in the next year. Whilst there is still some debate about exactly when this will happen borrowers need to consider the impact it will have on their finances now.
“With many lenders already pricing in increased rates those who are coming to the end of their mortgage deals should speak to an adviser about the best option for them sooner rather than later.”
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