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Scotland faces extra ‘challenge’ from interest rate hike

SCOTLAND’S sluggish economy means the country faces extra challenges after the Bank of England raised interest rates to their highest in nine years, experts have warned.

The Bank’s Monetary Policy Committee agreed unanimously to increase the base rate from 0.5 to 0.75 per cent, adding around £190 a year to the average variable-rate mortgage.

Bank Governor Mark Carney said the hike, only the second since the financial crash forced rates down to an historic emergency low, warned of further rises ahead.

He said “limited” and “gradual” increases were required to bring inflation down to its 2 per cent target now that the UK economic growth appeared to be picking up again.

He said: “Rates can be expected to rise gradually. Policy needs to walk, not run.”

The increase means a slight increase in returns for savers, but more costs for those in debt.

The majority of mortgage-holders, who have fixed rates, will not see a difference.

However the respected Fraser of Allander think tank at Strathclyde University said that, while the increase might suit the UK as a whole, it was not ideal for Scotland.

Institute director Professor Graeme Roy said: “The interest rate rise – to the highest rate since 2009 – marks an important milestone in the UK’s recovery from the financial crisis.

“Whilst costs for Scottish households with variable interest rate mortgages will rise, the overall cost of borrowing remains low by historical standards.

“However, with earnings growth remaining weak, the’s increase has the potential to weaken consumer spending and dampen growth.

“Scotland’s growth over the last three years has lagged behind the UK, so whilst the Bank may judge that the UK economy is in sufficiently robust health to cope with a rate hike, a rate rise in Scotland may be more of a challenge.”

The Scottish Fiscal Commission, which determines the spending envelope for the Scottish Government, has forecast Scotland’s GDP growth will stay below 1 per cent for five years.

The MPC baulked at a rate rise earlier this year after the economy dipped as a result of the extreme winter weather caused by the “beast from the east”.

But Mr Carney said growth had since “rebounded”, and the Bank raised its UK economic outlook in 2019 from 1.7 to 1.8 per cent growth in GDP.

The raise is likely to be the last before Brexit in March 2019, when Mr Carney has said the increase could be reversed to cope with any economic shock.

Liz Cameron, the chief executive of the Scottish Chambers of Commerce, said the raise was “disappointing” given the lack of hard evidence about the economy and Brexit uncertainty.

She said: “The Bank of England must tread carefully when it comes to further changes in interest rates.

“Pay rises are only just managing to outpace inflation, so this increase is likely to do little to encourage consumer confidence among the millions of Britons with variable rate mortgages.

“It is also unlikely it will provide much benefit to savers, or any lasting boost to the pound, with currency markets much more concerned about further clarity in the Brexit negotiations.”

The Institute of Directors said the Bank had “jumped the gun” by raising the rate now.

It said: “The rise threatens to dampen consumer and business confidence at an already fragile time. “Growth has remained subdued, and the recent partial rebound is the least that could be expected after the lack of progress in the year’s first quarter.”

Suren Thiru, head of economics at the British Chambers of Commerce, said: “The decision to raise interest rates looks ill-judged against a backdrop of a sluggish economy. While a quarter-point rise may have a limited long-term financial impact on most businesses, it risks undermining confidence at a time of significant political and economic uncertainty.”

SNP economy spokesperson Kirsty Blackman MP added: “The hike in interest rates will deliver a further blow to the living costs and standards of millions of families across the UK, who are already feeling the squeeze as prices rise too fast.

“That apprehension is not helped by the continued uncertainty and instability caused by the UK government’s chaotic approach to Brexit, and its reckless rhetoric of a no-deal outcome – which will harm the economy, hit jobs and impact on small and large businesses.

“It’s time the UK government acted in the interests of the country, rather than the Tory party, so that households, low earners and businesses are not put under further strain.”

Shadow Chancellor John McDonnell said the rise was a blow to those struggling with debt.

He said: “The Tories’ economic failure is making life difficult for families across the UK. They must change tack and end austerity once and for all.”

John Macintosh, head of tax in for Deloitte in scotland, said: “Sub-trend growth and a cloudy outlook hardly make a compelling case for a higher UK rates. In six months’ time this decision will look either prescient or premature. Either way it is bold move.”

David Alexander, managing director of the leading Scottish estate agents DJ Alexander, said: “I believe that the increase will not have a detrimental impact on the Scottish property market, whose growth in several areas is out-pacing the rest of the UK. Many of our clients’ properties are continuing to achieve sales levels that are significantly over the asking price.”

Tory MP Robert Jenrick, Exchequer Secretary to the Treasury, said: “Our balanced approach has helped keep mortgage rates low, while also reducing the national debt and helping with the cost of living.”

Source : HeraldScotland

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