BoE launches its first rate hike in a decade
london — The Bank of England on Thursday raised its main interest rate for the first time since 2007, or before the global financial crisis.
Policymakers voted 7-2 to tighten borrowing costs to 0.50 per cent from a record low of 0.25 per cent, as a weak pound caused by Brexit uncertainty has hiked the cost of imports into Britain and in turn sent the country’s inflation rising far above the BoE’s target.
“The time has come to ease our foot off a little from the accelerator,” BoE governor Mark Carney told a press conference. Carney himself voted for the rate hike.
“While the sheer novelty of the first increase in bank rates in a decade creates some uncertainty around its impact, there are reasons to expect it to be no larger than usual,” Carney said. — AFP
london — The Bank of England (BoE) raised interest rates for the first time in more than 10 years on Thursday and said it expected only “very gradual” further increases over the next three years.
The BoE said its nine rate-setters voted 7-2 to increase its benchmark bank rate to 0.50 per cent from 0.25 per cent, reversing the emergency cut made in August 2016, shortly after the shock decision by British voters to leave the European Union.
It was the first time that the BoE increased borrowing costs since 2007, before the eruption of the global financial crisis, which tipped Britain into its deepest recession in decades.
However, sterling fell around a cent against the US dollar and government bond yields dropped by five basis points as markets homed in on the BoE’s cautious approach to future rate rises.
The two Monetary Policy Committee (MPC) members who voted to keep rates steady, deputy governors Jon Cunliffe and Dave Ramsden, shared the widespread view among economists outside the BoE that wage growth is too weak to justify a rate rise now.
But most MPC members, including governor Mark Carney, decided it was time to start to tighten policy, despite the British economy’s sluggish performance this year.
“The MPC now judges it appropriate to tighten modestly the stance of monetary policy in order to return inflation sustainably to target,” the BoE said in a statement.
“All members agree that any future increases in Bank Rate will be at a gradual pace and to a limited extent,” it said, repeating its previous signals on what is likely to happen to borrowing costs.
The BoE said debt servicing costs paid by British households and companies would remain “historically very low” despite the hike.
At its previous meeting in September, the MPC had voted 7-2 in favour of keeping rates on hold. But it warned then that rates could rise “over the coming months”.
Economists polled by Reuters had overwhelmingly predicted a hike at November’s meeting, although nearly three-quarters of them thought it was too soon to make such a move, given the deep uncertainties about Brexit and weak wage growth.
“They’ve erred on the dovish side as far as the comments are concerned,” Craig Erlam, an analyst with brokerage Oanda, said. “We have to wait for the Press conference but there’s nothing in the initial comments that suggest we should expect another rate hike in the next 12 months.”
But George Buckley, an economist with Nomura, said there was still a chance that the BoE would raise rates more quickly than markets expect because it saw inflation slightly above its two per cent target over the next three years.
“They removed the comments about the need for rates to rise more quickly than the markets have been pricing in. But the sentiment is still there,” Buckley said.
BoE dilemma
The split on the MPC reflects the dilemma facing the central bank.
The mPC now judges it appropriate to tighten modestly the stance of monetary policy in order to return inflation sustainably to target Bank of England
On the one hand, Britain’s economy has grown only slowly this year as a jump in inflation caused by the slump in the value of the pound after the Brexit vote pinched spending by consumers. Also, companies are offering sub-inflation pay increases to their staff.
The central bank said the decision to leave the EU was already having a “noticeable impact” on the economic outlook.
But it downgraded its estimate of how fast the economy could grow without generating excess inflation, justifying its decision to raise rates.
Consumer price inflation hit a five-year high of three per cent in September — mostly due to the fall in the value of the pound — and the BoE said it expected it to peak at 3.2 per cent in October. The lowest unemployment rate since the 1970s and an expected improvement in lacklustre productivity growth suggested pay growth was about to rise, the BoE added.
The BoE said it expected inflation to fall back to close to its two per cent target only if bank rate rose in line with the “gently rising” path implied in financial markets.
This would mean rates hit one per cent by 2020, with one increase of a quarter of a percentage point likely next year, according to detailed forecasts in the Inflation Report.