The Bank of England has increased the base rate from 0.5 per cent to 0.75 per cent. This is only the second time in a decade that the bank has lifted rates.
Striking a hawkish tone, all nine of the Bank’s monetary policy committee (MPC) voted to increase rates, contrary to market expectations of a 7:2 split and bank governor Mark Carney cautioned in a press conference after the announcement that more were on the cards.
It came as the MPC slightly upgraded UK GDP growth in 2019 (from 1.7 to 1.8 per cent) in its latest Quarterly Inflation Report and also predicted that inflation is now projected to be a touch above its two-year target of two per cent.
In a press conference after the announcement, Mr Carney said that further rate rises would be “gradual” and “limited” and that the bank would be cognisant of any potential fallout from Britain leaving the European Union.
In its Quarterly Inflation Report, the bank said that a recovery in GDP growth in the spring is expected to have been driven by a pickup in consumption growth, with household spending, consumer credit growth and property transactions – which were weak in Q1 – bouncing back since then.
The August report said: “This suggests much of the earlier weakness was erratic.”
Despite the surprise fall in retail sales in June, the report highlighted that retail sales grew by 2.1 per cent over the quarter.
It added: “In the past year, the number of retail store closures have increased and retail footfall has fallen. Contacts of the bank’s agents suggest that mainly reflects shifts in consumer demand to online stores and from goods to services. And although growth in household money has slowed, that appears to reflect an unwind of past shifts in demand for different assets.”
But some retailers will be questioning the move before the UK agrees a final deal with the EU as consumer confidence in the high street remains fragile.
Patrick O’Brien, UK Retail Research Director at GlobalData, a leading data and analytics company, said: “While the Bank of England believes that the UK economy is in strong enough shape to withstand an interest rate increase, UK retailers will be scratching their heads, wondering where this confidence is coming from.
“Consumer borrowing continues to climb, despite wages finally rising faster than inflation, but we do not believe that this is going to create a much-needed boost for the high street.
“Food inflation has reduced the money consumers have left to spend on non-essential purchases, leading to increased trading down across retail.
“Many retailers have collapsed this year, with more to come in the coming months. As retail braces itself for the possibility of tumultuous Brexit decisions, with talk of stockpiling in preparation for an exit from the EU, any dampening of shopper spending power, however slight, cannot be welcomed.”
Matthew Todd, co-owner of retailer Herbert Todd and Son in York, agreed.
“We were aware that it was going to happen at some point, and it is coming off a very low base, but with the general apathy on the high street as people wait to see what will happen with Brexit, it’s just another slightly negative thing to knock consumer confidence.”