Bank of England raises rates above crisis lows, signals no rush for next hike
The Bank of England pushed interest rates above their financial crisis lows on Thursday, but signalled it was in no hurry to raise them further as Britain heads for Brexit next year with no clear plan for leaving the European Union, Reuters reports.
The BoE’s nine rate-setters were unexpectedly unanimous in their vote to raise rates to 0.75 from 0.50 percent, the level at which they have spent most of the past decade, apart from a period after the 2016 Brexit vote when they were cut even lower.
Economists polled by Reuters had mostly expected a 7-2 vote in favour of a hike.
But sterling fell against the dollar and the euro and British government bond prices rose after BoE Governor Mark Carney stressed the gradual path for rate hikes ahead.
“Policy needs to walk — not run — to stand still,” he said as he explained a new BoE estimate of neutral interest rates for Britain’s economy, which the central bank believes will rise only slowly against the backdrop of a strong global growth.
Growth in Britain, the world’s fifth-biggest economy, has slowed since the referendum decision in 2016 to leave the EU.
The BoE nevertheless said the economy was now operating at almost its “speed limit”, or full capacity, raising the prospect of more home-grown inflation pressure ahead.
Business groups were critical of the decision to raise rates now. The British Chambers of Commerce said it was ill-judged given the degree of uncertainty around Brexit and the Institute of Directors said the BoE had “jumped the gun”.
With less than eight months until Brexit, London and Brussels — as well as key members of Prime Minister Theresa May’s Conservative Party — remain far apart on what their future trading relationship should look like.
But Carney said there was a wide range of outcomes for Brexit — most of which would require rates to be at least as high as now — and that the central bank was working on the assumption that there would be a smooth transition.
“The mistake is to always wait, wait, wait until you have perfect certainty because we don’t know exactly when that higher degree of certainty is going to transpire,” he said.
The BoE’s message for rates remained one of gradual and limited increases as it saw inflation only a fraction above its 2 percent target over the next few years.
It said its forecasts were based on bets by investors who expect another rate hike only in late 2019 or early 2020, with Bank Rate creeping up to 1.1 percent in late 2020. That was a fraction lower than a projection of rates of 1.2 percent the last time the BoE published forecasts for the economy in May.
“The economy has done just about enough for the Bank of England to justify a hike today. But no one should get too excited about this being a sign of things to come,” said Luke Bartholomew, an investment strategist at Aberdeen Standard Investments.
“It is almost unthinkable that the Bank of England will follow up with further rate rises in the next few months given the risks on the horizon.”
The central bank said inflation in two years’ time was likely to be 2.09 percent, above the BoE’s 2 percent target.
It also expected Britain’s economy would grow by 1.4 percent this year, unchanged from its forecast in May, but it nudged up its 2019 forecast to 1.8 percent from 1.7 percent.
Wages were likely to be growing by an annual 2.5 percent at the end of this year, a bit slower than forecast in May, before picking up to 3.25 percent by late 2019, unchanged from before.