Why Bank of England has raised rates for the first time in a decade

By: | Updated: November 2, 2017 7:56 PM

The Bank of England on Thursday increased the interest rates for the first time in over a decade to 0.50% from 0.25%.

The Bank of England on Thursday increased the interest rates for the first time in over a decade to 0.50% from 0.25% (Image: Reuters)

The Bank of England on Thursday increased the interest rates for the first time in over a decade to 0.50% from 0.25%. The reason: Post Brexit, the value of Pound fell significantly, leading to higher inflation at 3% by September. To quell the “spiralling cost” of living in British households, the Bank of England cut the interest rates. The decision comes as a reversal of the emergency cut as a contingency plan in August last year — shortly after the Brexit vote.

The Bank of England said it expected only “very gradual” further increases over the next three years, Reuters reported.  The Bank said its nine rate-setters voted 7-2 to increase its benchmark Bank Rate to 0.50 percent from 0.25 percent, 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 Bank 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 GBP= and government bond yields dropped by 5 basis points as markets homed in on the Bank’s cautious approach to future rate rises. The Bank did not repeat the previous language about markets underestimating the extent of future rises. BoE Governor Mark Carney said the sheer novelty of a first rate hike created some uncertainty about its impact on the economy, but on the there was no reason to expect it to be larger than normal.

Domestic inflation pressures were likely to build, he said. “It isn’t so much where inflation is now but where it is going that concerns us,” Carney said in a speech following the decision. But he added that even after today’s rate increase, monetary policy will provide significant support to jobs and activity.

The two Monetary Policy Committee members who voted to keep rates steady, deputy governors Jon Cunliffe and Dave Ramsden, shared the widespread view among economists outside the Bank that wage growth is too weak to justify a rate rise now. But most MPC members, including 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 Bank 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.

(With inputs from Reuters)

 

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