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Bank follows the script, for a change - HL comment

Ben Brettell, Senior Economist, Hargreaves Lansdown:

The Bank of England followed the script today and raised base rate to 0.5%. The move was widely expected, but sterling has still lost almost a cent, as the accompanying minutes guided towards a gradual pace of rate rises from here. The FTSE rose marginally.

Today’s move is largely symbolic – even though it’s the first rise in more than a decade.

The rights and wrongs of the decision will be debated ad infinitum, but it a 25-basis-point increase merely reverses last year’s cut – which was arguably unnecessary – and returns rates to where they’ve been for the entire post-crisis period. So not much has changed.

It’s easy to argue today’s rate hike is just as unneccessary as last August’s cut.

The spike in inflation is largely driven by a one-off currency movement which will fall out of the figures in due course. Beyond the currency effect there appear to be few underlying inflationary pressures. Labour costs are the main factor in domestic inflation, and growth here remains below long-term averages. Productivity growth is sluggish, and technological changes look to be suppressing wages, with the likes of Uber, Amazon and Netflix disrupting traditional industries.

Furthermore we need to consider demographics. The baby boomers are retiring in their droves. They have already gone through their consumption phase – they have bought their houses, cars and consumer goods. The generation behind them is saddled with debt and struggling to get on the housing ladder. All in all I see more deflationary forces than inflationary at present.

However, in reality today’s hike makes little difference to the real economy. We’re still firmly in the era of ultra-low rates. Savers are still earning next to nothing, and borrowing is still cheap. While two further rises are on the cards next year I expect the Bank to proceed with caution. The UK is lagging behind developed world counterparts in terms of growth, with Brexit-related uncertainty still casting an ominous shadow.