LONDON — Wednesday marks exactly 10 years since the Bank of England last raised interest rates in the UK, marking a decade of ever looser monetary policy and unprecedentedly low borrowing costs for Brits.
On July 5, 2007, the bank’s Monetary Policy Committee voted six to three in favour of increasing interest rates to 5.75%.
Expectations at the time were that the bank would hike again later in the year, taking rates to 6% — a level not seen since the late 1990s.
That hike never came, with the financial crisis starting to crystallise later in the year, leading the bank to begin a cycle of rate cuts designed to protect the British economy from the worst consequences of the crash. On December 6, 2007 the bank lowered rates to 5.5%, eventually taking its base rate to just 0.5% less than two years later.
“Interestingly, if you look across the wider G20 then there are only two other central banks who can also say that they have gone at least 10 years since last hiking,” Deutsche Bank’s Jim Reid said in his Early Morning Reid.
“One is Japan and the other is Saudi Arabia. Those two countries last hiked their benchmark rates in February 2007, so only a few months ahead of the BoE.”
“It’s been a decade since the last interest rate rise, so it’s little wonder that borrowers have got used to the idea of cheap money,” Laith Khalaf, senior analyst at Hargreaves Lansdown said in a statement.
“Indeed around 8 million Britons haven’t witnessed an interest rate rise from the Bank of England in their adult lives.
“Low interest rates undoubtedly helped to prop up the economy in the wake of the financial crisis, by lowering the cost of debt for UK consumers and companies.
“However the burden of loose monetary policy has very much fallen on those with cash in the bank, who have seen the interest they receive wither away to virtually nothing.”
The 10-year anniversary of July 2007’s hike comes at a time when the bank is seriously considering increasing rates once again. Granted, the move will be from 0.25% to 0.5% — not 5.5% to 5.75% — if and when it happens, but it will be a significant step towards normalising monetary policy in the country which has effectively been in emergency mode for almost 10 years.
Right now, the bank faces a policy dilemma that is starting to split its Monetary Policy Committee.
At its simplest level, the policy dilemma facing Britain’s central bank is that it must balance surging inflation brought on by the weakened pound since the referendum, with the slowdown in the economy, dwindling consumer spending and declining inward investment.
Inflation currently sits at 2.9%, well above the 2% target mandated by the government, while GDP growth in the first quarter of 2017 was just 0.2%.
Since the referendum last year, the bank’s doves — those who are in favour of keeping policy loose — have been the dominant voices. However, since three of the MPC’s members voted to increase rates at its June meeting, the hawkish voices in the Old Lady of Threadneedle Street have become louder.
Light was shed on the issues on Tuesday when the most dovish and most hawkish members of the MPC spoke to the press in virtually simultaneous interviews, and expressed diametrically opposed views.
Gertjan Vlieghe, a notorious dove, said that the current economic environment is one “where a premature hike would be a bigger mistake than one that turns out to be slightly late.”
On the flipside, Ian McCafferty, an arch-dove said: “I feel on the balance of monetary policy that there is a need for change. I think this would be justified and would be the prudent thing to do at this stage.”
The bank’s next move will be announced at its August meeting, with the potential for a hike being seriously considered for the first time since the crisis.