First interest rate rise in 10 years is a challenge to the Scots economy, warns top analyst Dr Graeme Roy

Thee Bank of England signalled more "gradual" increases are on the way to cool surging inflation as its nine-strong Monetary Policy Committee (MPC) voted 7-2 to raise rates from 0.25 per cent to 0.5 per cent, which marks the first increase since July 2007.

Bank of England governor Mark Carney said it is likely to rise twice more over the next three years.

Mr Roy, director of the Fraser of Allander Institute, Scotland's leading economic analysis institute, said that the change would be expected to trim around 0.15 per cent from GDP or Gross Domestic Product, arguably the most important of all economic statistics as it attempts to capture the state of the economy in one number.

But he said the increase may have a larger impact if markets and businesses interpret the change as a clear signal that monetary policy will be tightened in the coming months.

He said: "The latest figures confirm Scottish growth is around 1/3 that of the UK as a whole. 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.

"With the latest official retail figures published [on Wednesday] showing zero growth in [the third quarter of 2017] and consumer confidence still negative, it is clear that Scottish households are still finding economic conditions challenging."

Mr Roy, a former Scottish Government senior economic adviser and head of the First Minister's Policy Unit added: "While employment and unemployment have held up remarkably well, productivity and earnings growth have disappointed. Today’s rise in interest rates will therefore add a further – albeit very modest – headwind to Scotland’s growth prospects.”

The quarter-point rise reverses the emergency cut seen in the aftermath of the Brexit vote shock in August, 2016 as the Bank sought to head off turmoil in the economy.

Almost four million households who are not on fixed rate deals face higher mortgage interest payments after the rise, but it should give savers a modest lift in their returns.

As well as many of the country's 45 million savers, anyone considering buying an annuity for their pension will also see better deals.

Liz Cameron, chief executive of the Scottish Chambers of Commerce said businesses will be "disappointed" at the rise "during a period of profound economic uncertainty" adding: " The immediate effect of which was to bring the value of the pound down by one cent against the US dollar."

She said: "The Scottish Government must consider the effects of this rise - and potential subsequent rises outlined in the Bank’s forecasts - when evaluating their recently announced options for Income Tax rate rises."

Graeme Brown, Director of the homelessness charity Shelter Scotland, said: “While this is a modest rise in interest rates, we know there are many people already living on the edge of their finances and struggling to keep a roof over their heads and this will give them genuine concerns over how they can make ends meet."

Bank governor Mark Carney said: "With unemployment at a 42-year low, inflation running above target and growth just above its new, lower speed limit, the time has come to ease our foot off the accelerator."

The move comes as the Bank looks to dampen Brexit-fuelled inflation, which it predicts will now peak at around 3.2% this autumn.

The Bank's quarterly inflation report is based on financial market expectations for two more rate hikes over the next three years to return inflation back to its two per cent target, which could see rates hit one per cent by the end of 2020.

Case study: Robin Marlin

ROBIN Marlin has been around long enough to remember the late 80s recession which saw mortgage interest rates hit 15% between October 1989 and October 1990.

So the 57-year-old co-owner of car port and glass veranda manufacturer 123v is philisophical when discussing the first rise in interest rates in ten years.

Despite having a number of buy-to-let loans on properties and a personal mortgage on his Clackmannanshire home - he will not feel the pinch by the rise.

The father-of-four's one concern is if it is the start of a series of interest rate rises.

Mr Marlin who set up his family-run enterprise with his wife, Jayne in 1997 has grown into an employer of 30 with a turnover of £1.8 million.

The firm which is developing solar powered canopies in response to customers switching to electric vehicles and generating their own power, has invested almost £250,000 in a 5000 sq ft headquarters iun Tillicoultry doubling its floor space to make way for new products.

He believes that the interest rate rise will mean the pound will get stronger and that his business will gain as the material he imports will be cheaper.

He said: "On a £100,000 mortgage it makes £4.80 a week difference.  It is nothing to what in comparison to what has happened in the past.

If there is another rise maybe a quarter of a percent next year, then it's nothing dramatic."

The former double glazing salesman added: "If I go back to my early career in the late 80s, in May, 1988 the interest rate was 7.35 per cent in October, 1989 a year later it was 14.875 per cent. My mortgage was 18 per cent interest rate and nobody was buying anything. And that was an absolute showstopper.  

"Can you imagine an 18 per cent mortgage?   You would go down the street and find everyone was hanging from the lampposts.

"What a lot of people aren't appreciating is the Bank of England interest rate isn't really the big issue with borrowing. It's the difference between that bank rate and what you can borrow money at.   

"You used to be able to get mortgages at half a per cent or one per cent above the base rate. It's very difficult to get that now."

He said that he would like to see more interest-only mortgages offered so that more people could afford to own their own homes.

"The only way it can hurt a small business, is if people think it is the beginning of a load of interest rate rises. That would worry people," he said.

"But when you look at people with credit cards, load of people are paying 18, 20, 25 per cent interest on the credit cards. Are they going to complain about a quarter a per cent?"

Case study: Dr Neil Robson

SCIENTIST turned chocolate maker Dr Neil Robson, believes the interest rate rise is a "reasonable move" which will help to control consumer debt.

Mr Robson, 44, who with his wife Suzanne formed Rebel Chocolate will see a small hit in the mortgage payments of their home in Glasgow's west end, as they have a tracker loan which goes up and down depending on the Bank of England base rate.

And Mr Robson, a former immunologist at the University of Glasgow, said there may be concerns in terms of getting loans for his healthy chocolate business if the interest rates keep going up.

The expanding small firm have been ramping up production form the current 200 90g bars per week to 2,000 by the end of the year. Rebel contains less sugar and more cocoa, while being high in protein and lactose free.

Mr Robson, who studied biochemistry and molecular biology in New Zealand before moving to Glasgow, said: "It s pretty reasonable move.  I don't think it is a bad thing to do.   Hopefully it just stays at 0.5 per cent for a while."

The executive, who began working on Rebel after a back injury sustained doing martial arts training ultimately prevented him from continuing with his research, added: "If they went up a quarter of a per cent every few months then that would obviously be worrying, but in the current environment with Brexit and everything that's going on, I really don't think it is going to go up quickly.

"It will affect our mortgage as we are on a tracker, but looking at the bigger picture, with people getting into more debt, and debt levels increasing more, I think it is a good thing to slow that down a wee bit.

So it's a good decision."