The Bank of England has increased the base rate from 0.5% to 0.75%. This is only the second time in a decade that the bank has lifted interest 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 the 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 (1.8% from 1.7%) to in its latest Quarterly Inflation Report and also predicted that inflation is now projected to be a touch above its two-year target of 2%, reflecting the impact of a drop in the pound against other major currencies since May.
In a press conference after the announcement, 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: “The MPC continues to recognise that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal.”
It also 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% over the quarter – the biggest quarterly rise in three years.
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.”
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 data and analytics firm GlobalData, 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. This is even happening in sectors not previously known for being price driven, such as kitchens and bathrooms, as Travis Perkins highlighted with its poor results at DIY retailer Wickes.”
Travis Perkins shocked the market earlier this week with torrid second quarter earnings at Wickes, as customers abandoned its showrooms over the wet and stormy spring.
“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,” O’Brien added.
Derek Miller, co-owner of Scope Bathrooms in Glasgow, said: “It’s not in itself the end of the world, but as part of the bigger picture, it adds more pressure on to a precarious business outlook.”
While one leading KBB supplier in the UK, InHouse Inspired Room Design, which supplies kitchens and bathrooms to 500 independent showrooms, completely shrugged off the bank’s move.
Managing director Wayne Dance welcomed the increase for those “who have big deposits in bank accounts and will start to see a better return on their cash pots” and said his business was experiencing “record sales” so far in 2018.
He added: “Most mortgages are fixed at two to five years, therefore any increase won’t be felt by any borrower until their fixed period expires, by which time most people will have a much better idea of where Brexit is going and what it means.
“0.75% is still one of the lowest rates ever, so it is still a good reason to buy, as bricks and mortar usually appreciate in value more than 0.75% per annum.
“I’m sure that this increase will initially cause raised eyebrows, but when the dust settles it will be seen as it really is. A very small change.
“Europe needs Britain and Britain needs Europe no matter what happens with Brexit or interest rates. The world is getting smaller every year and we all need each other and it’s easier to access each other through travel and the internet. I don’t think a quarter of a per cent interest-rate hike will even cause a ripple in the way we have to work with each other – Brexit or no Brexit.”
One economics consultancy, Pantheon Macroeconomics, said that it anticipates the bank to now wait until May next year to raise rates again or risk choking off the housing market.
Samuel Tombs, chief UK economist at the firm, said: “We expect the economy to regain some momentum next year following a soft Brexit outcome, enabling the MPC to raise bank rate twice in both 2019 and 2020, exceeding the glacial pace of tightening currently priced-in by markets.”
Certainly, it seems the chief concern right now for many KBB retailers is the potential damage from Britain’s leaving the European Union.