Bank of England Raises Rates for First Time in a Decade

Bank of England Raises Rates for First Time in a Decade

Advertisement

LONDON — The Bank of England raised its main interest rate on Thursday for the first time in a decade, joining its central bank peers in rolling back stimulus measures taken during the global financial crisis.
The rate increase comes at a delicate time for the British economy: The central bank is trying to strike a balance between moderate growth and rising prices, while the value of the pound has declined sharply.
The move on Thursday essentially resets a rate cut last year, when policymakers worried that a sharp economic slowdown was on the horizon after Britain’s vote to leave the European Union, a process known as Brexit. The British economy has not slipped into a recession as some has feared, but uncertainty has lingered as the country goes through a tricky “Brexit” negotiation process.
On Thursday, the central bank’s Monetary Policy Committee voted 7 to 2 to raise its benchmark rate to 0.5 percent, an increase of a quarter of a percentage point from a historic low announced in August 2016.

“The decision to leave the European Union was already having a noticeable impact on the economic outlook,” the Monetary Policy Committee said in its policy statement. “The overshoot of inflation throughout the forecast predominantly reflected the effects on import prices of the referendum-related fall in sterling.”
It added, “The M.P.C. now judges it appropriate to tighten modestly the stance of monetary policy in order to return inflation sustainably to the target.”
Policymakers had telegraphed that a rate increase was on the horizon. The committee said in September that a majority of its members felt the tightening of stimulus measures would most likely be appropriate “over the coming months,” to help bring inflation toward its target of 2 percent. Inflation reached 2.8 percent in September, its highest level in five years.
The central bank said on Thursday that it expected inflation to peak above 3 percent when figures for October are released, and to “fall back” over the next year, approaching its target of 2 percent by the end of its forecast period in 2020. It added that it expected inflation to reach 2.4 percent in the fourth quarter of next year.
Britain’s economy has grown only moderately in the past 12 months, even as the rate of inflation increased steadily and unemployment fell to its lowest level in more than four decades.

The looming question, however, is whether Thursday’s rate increase will be a one-time step or the beginning of further tightening by the Bank of England.
A decade after the beginning of the financial crisis, other central banks have started pulling back on stimulus amid more robust growth in the United States and in the eurozone.
The Federal Reserve has raised interest rates twice this year and has signaled that at least one more rate increase is likely before the end of the year. And the European Central Bank said last month that it would begin scaling back its purchases of government and corporate bonds, a stimulus program known as quantitative easing.
A number of economists say they believe the Bank of England will be cautious about pushing rates higher, though, at least in the short term.
“It’s not as if this is likely to be the start of a strong run of rate rises,” said Lucy O’Carroll, chief economist at Aberdeen Standard Investments. “Even tentative indications of further rate rises to come are nothing more than that. The bank’s outlook depends on a so-called smooth Brexit. Without that, all bets are off.”

Advertisement

Manhattan Terror Attack Timed to Maximize Death Toll, Officials Say

With Tweet, Trump May Add Burden to Prosecution of Attack Suspect

ISIS Is Quick to Claim Credit, Unless There’s an Arrest

How Russia Got Americans to Turn Against One Another

Advertisement