Bank of England paves way for first rate increase in a decade
The Bank of England said it was likely to raise interest rates in coming months if the economy and price pressures kept growing, flagging Britain’s first rate hike in a decade. Policy makers voted 7-2 on Thursday to keep rates on hold for now at a record-low 0.25 per cent, as expected.
But in a week when data showed prices rising faster and unemployment falling to a fourdecade low, they said their tolerance for above-target inflation was lessening.
The Brexit vote has put the Bank of England in a dilemma as it sought to balance the need to support the economy through the shock of leaving the European Union in March, 2019, while also keeping a grip on fast-rising inflation. It said that, if the trend toward shrinking spare capacity and rising underlying inflation continued, “some withdrawal of monetary stimulus was likely to be appropriate over the coming months.”
Sterling leapt by a cent against the U.S. dollar after the statement and 10-year gilt yields increased by four basis points to 1.18 per cent, their highest level since the central bank’s most recent meeting on Aug. 3.
“I would describe [a rate hike in] November as being live,” Nomura economist George Buckley said.
But weaker than expected inflation or disappointing growth in jobs or wages could still throw the bank off course, he added.
The Bank of England and its Governor, Mark Carney, have previously signalled the probability of rate hikes ahead, only to be caught out by unexpected changes in the economy.
On Thursday, it said the economy was doing a little better than it had expected last month, and that inflation was likely to rise further above its 2-per-cent target to exceed 3 per cent in October – slightly more than previous forecasts – after reaching 2.9 per cent last month.
But it said it was “unclear how sustained any increase in GDP growth might be over the medium term,” citing unknowns about how households and businesses would react to the Brexit process.
The bank repeated a previous message that all nine members of the country’s monetary policy committee thought rates could rise faster than financial markets expected but any increases would be gradual and limited.