30 November 2017
Bank of England’s Monetary Policy Committee votes to increase interest rates
For the first time in over 10 years, the Bank of England’s Monetary Policy Committee (MPC) has voted to increase interest rates from 0.25% to 0.5%. Bank Rate is the official interest rate set by the MPC and influences other interest rates charged by banks and building societies, and paid on deposits.
The Bank of England’s Agents regularly consult with Build UK as part of their work to understand how the state of the construction industry contributes to the overall economic situation in the UK. Below Peter Andrews, Agent for Greater Londonexplains the MPC’s decision.
“Parliament has given the MPC responsibility to keep inflation at 2% a year. Consumer Price Inflation (CPI) is currently around 3%. To ensure that inflation comes back down to the target, a majority of MPC members agreed that Bank Rate should increase a little, starting with a rise of a quarter of one percent. What was that judgement based on?
One positive aspect of the UK economy is that unemployment is at its lowest since 1975. More jobs mean more people have money to spend, which will support consumer demand. However very low unemployment is also likely to mean that wages will increase more quickly as companies compete to take on new staff and keep existing workers.
In discussions with construction businesses, examples where skill shortages are pushing up on pay are becoming more frequent.
If wages increase more quickly, prices will also begin to rise more quickly, as companies pass on higher staff costs. And, with so few people out of work, there is little scope for the economy to grow by increasing the workforce.
The main factor determining how quickly our economy can grow will be how much more we can produce more with the resources we have.
The MPC thinks the UK economy is growing at around its speed limit. If it grew any faster, that would push up on inflation. So a small rise in interest rates now is necessary to control inflation in future. While this will increase borrowing costs for some, we expect the impact to be modest. The MPC also expects that any further rises in interest rates will happen at a gradual pace and to a limited extent.”
Build UK will continue to work with the Bank of England to share information and ensure that the construction sector contributes to future UK economic analysis. You can read the latest summary of the Bank of England findings here.