Better-than-expected economic news sugars interest rate pill

The headlines from yesterday’s Bank of England announcement are dominated by the base rate rise, but there’s been some unexpected good economic news too.

Firstly the BoE suggests that inflation has peaked and is heading to around 4.0 per cent by the end of the year. before going below the bank’s 2.0 per cent target. However, it is important to understand that this doesn’t mean prices are falling – they are rising more slowly so the pressure on our pockets remains.

Secondly, future interest rate rises may be smaller and fewer. Two members of the Bank’s monetary policy committee thought the previous rate increases were still helping to bring down inflation and so they were hesitant to press ahead with another.

And thirdly the Bank’s outlook for the wider economy suggests that the recession will be shorter and shallower than expected, with fewer redundancies.

However, in the meantime analysts are digesting yesterday’s base rate rise - the 10th on the trot.

Helen Morrissey, an analyst at Hargreaves Lansdown, says: “The clobbering continues for people on tracker and SVR mortgages who will feel the impact of this rate rise straightaway. Recent data from Moneyfacts put the average SVR at 6.64 per cent in January, so if this rise is passed on, we are looking at rates close to 7.0 per cent.

“An interest rate hike should be good news for savers, but the reality is it’s much more complicated than that. Interest rates on savings accounts in the biggest banks have increased over the past year, but only slightly. There’s no obligation to pass on interest rate rises to savers, so this means many have only passed them on in part and at a very slow rate. Even if they decide to pass on the rate increase, we may not see any movement in interest rates for several weeks.”