Bank ‘May’ Increase Interest Rates

The Bank of England could be set to increase the base rate next week, it has been suggested.

According to the Chartered Institute of Purchasing and Supply/NTC purchasing managers’ index (PMI), manufacturing output grew to 55.7 over the course of July, up by one point from the previous month’s figures and the highest level recorded since July 2004. With new orders within the industry rising at their fastest pace for more than a year and employment increasing for the seventh consecutive month, factory gate inflation is currently said to be at its highest since the PMI began in 1992.

Meanwhile, with the cost of raw materials such as oil and plastics said to be driving global growth, the British sector was reported to be outstripping the effect of five increases to the interest rate by the Bank of England’s monetary policy committee (MPC) over the last 12 months. As a result, a number of financial analysts claim the Bank could choose to push up rates to at least six per cent within the next few months, in a move that while intended to curb the growing manufacturing industry could also see more consumers struggle further with their day-to-day finances and making repayments on secured loans.

Commenting on the figures, Ian Kernohan, economist for Royal London Asset Management, said: “While the consumer and housing data has showed some signs of weakness, it’s not really convincing enough to prevent a further hike in rates. A rise in the latest manufacturing PMI, followed by a strong services PMI later this week, should be enough to sanction a September rate rise and on the stitch-in-time argument will no doubt prompt some votes for a back-to-back rise in August.”

Meanwhile, Howard Archer, chief UK and European analyst for Global Insight, claimed that while the announcement of such “substantially stronger” results than expected would be used as a tool by some MPC members to vote for a rise next week, the base rate is likely set to stay at 5.75 per cent for at least another month. “The robust manufacturing purchasing managers’ survey is most unlikely to push the Bank of England into raising interest rates on Thursday, but it will certainly fuel expectations that interest rates will rise by a further 25 basis points to six per cent in the autumn,” he said. However, Mr Archer claimed that even this was not certain, in part due to the PMI figures and “disappointing inflation data for June”. He added that recent statistics pointing to a curb in consumer spending and slowing house prices are “far from conclusive”.

With future increases to the base rate predicted to take place either this month or later on in the year, consumers could well be set to find their mortgage costs increasing. Following the July rise, Mike Naylor, personal finance expert for uSwitch.com, claimed that secured loan repayments have surged by £677 since the start of the year. However, he suggested that “more savvy” homeowners could negate the impact of base rate rises by switching to more competitive offers on current accounts, loans and credit cards.

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