The Bank of England on Thursday raised its main interest rate for the first time since 2007 as it tackles Brexit-fuelled inflation, and signalled more hikes lie ahead.
Policymakers voted 7-2 to tighten borrowing costs to 0.50 percent from a record low of 0.25 percent, as a weak pound caused by Brexit uncertainty has hiked the cost of imports into Britain and in turn sent inflation rising far above the BoE’s target.
Thursday’s hotly-anticipated move mirrors policy tightening seen in the United States and eurozone as the global economy strengthens overall.
“The time has come to ease our foot off a little from the accelerator,” BoE Governor Mark Carney told a press conference following the decision.
“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.”
Rising interest rates tend to increase repayments for borrowers and therefore stretch household budgets — which are already being eroded by weak wage growth and high inflation. However, they also boost income for savers.
Carney himself voted with the majority in favour of the rate hike, but two MPC members felt there was “insufficient” evidence of a recovery in wage costs.
Sterling slid in value after the BoE cautioned that any more hikes would be very gradual.
The BoE nevertheless hinted that more increases could be on the way, saying it stood “ready to respond” should the economy require it.
And the bank downgraded the 2017 economic growth forecast to 1.6 percent from 1.7 percent previously.
“The decision to leave the European Union is having a noticeable impact on the economic outlook,” the bank noted in the minutes of its regular policy meeting.
“The overshoot of inflation throughout the forecast predominantly reflects the effects on import prices of the referendum-related fall in sterling.”
– ‘Considerable risks’ to outlook –
GDP guidance for 2018 and 2019 was maintained at 1.6 percent and 1.7 percent expansion respectively, despite looming Brexit.
The BoE had however warned in July last year that Britain could fall into recession as businesses delay investment decisions because of Brexit.
“There remain considerable risks to the outlook, which include the response of households, businesses and financial markets to developments related to the process of EU withdrawal,” it said Thursday.
The London stock market extended gains on the news, as a weaker sterling helped the earnings prospects of exporters.
It is the first BoE hike since before the financial crisis, when the rate were ratcheted up to 5.75 percent in July 2007. The bank subsequently cut borrowing costs to ultra-low levels after the 2008 global financial crisis.
Thursday’s quarter-point increase reverses an emergency rate cut implemented in August 2016 on fears over the economic impact of the shock Brexit referendum that has not materialised.
The 12-month inflation rate accelerated in September to 3.0 percent — the highest level for more than five years, recent official data showed.
And the BoE now expects the rate to peak at 3.2 percent this autumn, further above its 2.0-percent target.
– Tough Brexit talks –
Britain is on course to depart from the European Union in March 2019 — but London remains locked in exit negotiations with Brussels.
Carney cautioned that the outlook would depend on those tough talks.
“The impact of Brexit on the forecast will evolve as negotiations progress,” he said.
“Any resolution of the uncertainty about the nature of, and transition to, the UK’s future relationship with the EU — insofar as it affects the behaviour of households, businesses and financial market participants — would prompt a reassessment of the economic outlook.”
The BoE meanwhile refrained Thursday from altering its quantitative easing (QE) or cash stimulus policy, which it launched to encourage lending and growth in 2009.
That was in contrast to the European Central Bank, which last week began weaning the eurozone economy off stimulus it had prescribed in recent years.
The Federal Reserve kept US interest rates unchanged Wednesday, having lifted borrowing costs twice so far in 2017.
Source: The Punch Newspaper