History shows a house price mini-boom and almost no change in inflation is what greets Britons in the six months after an interest rate hike, new research reveals. Comment Ross Andrews, Director, Minerva Lending plc.
The Bank of England has raised interest rates 20 times since it won its independence in 19972. But analysis of six key economic indicators following each adjustment suggests that the immediate impact on the economy is not what you might expect.
The main reason the Monetary Policy Committee (MPC) will raise rates is to curb inflation, yet the study shows Consumer Price Inflation (CPI) has dropped just 0.1 percent on average six months on from a rate hike. Exporters worried a stronger pound will make their products more expensive to foreign buyers and hit exports might take comfort from the fact the analysis reveals exports were 2.5 percent higher on average six months after a rate rise.
Tourism spending by overseas visitors also rose by an average of 4.3 percent.
First-time buyers might be alarmed to discover that – after incredible growth in recent years – history suggests a stronger housing market in the aftermath of a hike. Rate rises by an independent Threadneedle St have historically been followed by bullish house price growth of 4.8 percent on average in six months. The value of retail sales has typically risen by an average of 1.7 percent, while the unemployment rate has been 0.2 percent lower on average.
Britain’s economic well-being as measured by GDP has fluttered on average just 0.1 percent higher. The biggest fall in CPI inflation was 0.8 percent in July 2007. Meanwhile, the biggest fall in retail sales, of 0.7 percent, occurred in July 2000. There were only two falls in house prices recorded six months after the Bank of England increased interest rates, the biggest of which was a 1.54 percent drop in January 2008.
Ross Andrews, Director, Minerva Lending plc, said: “There has been a lot of talk about the need for the Bank of England to raise interest rates to stop inflation spiralling out of control. However, the data from the last 20 years suggests interest rate rises on their own have had none of the immediate after-effects that you might expect. In the past, when people may have anticipated tourist numbers might dwindle, the statistics show they have in fact risen strongly on average.
“Circumstances will vary every time but the data show house prices, inflation and exports have all exhibited unexpected behaviour following previous rises. The first hike in interest rates in a decade will also likely have a psychological impact. How it impacts confidence may be the most important factor in how the wide economy performs six months on.”
