Bank of Eng­land paves way for first rate in­crease in a decade

The Globe and Mail (BC Edition) - - REPORT ON BUSINESS - DAVID MIL­LIKEN WIL­LIAM SCHOMBERG LON­DON

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.

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