Bank Of England Hikes Interest Rate For First Time In Decade

The Bank of England on Thursday raised its main interest rate for the first time since 2007, or before the global financial crisis, as it tackles Brexit-fuelled inflation.

Governor of the Bank of England Mark Carney (C) arrives for the announcement of the Bank of England quarterly Inflation Report and interest rate decision at the Bank of England in London on November 2, 2017. Stefan Rousseau / POOL / AFP

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 the country’s inflation rising far above the BoE’s target.

The hotly-anticipated move mirrors policy tightening seen in the United States and the 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. The minutes of the meeting showed that 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.

The BoE signalled that more rate hikes could be on the way, saying it stood “ready to respond” should the economy require it.

“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,” according to the minutes of a regular policy meeting that ended Wednesday.

– Pound falls, stock market up –

The pound, which has recently risen on expectations of a hike, tumbled in an immediate reaction, while the London stock market extended earlier gains as a weaker sterling helped the earnings prospects of exporters.

The BoE “will monitor closely… the impact of today’s increase in the bank rate, and stands ready to respond to changes in the economic outlook as they unfold to ensure a sustainable return of inflation to the two-percent target”, the minutes added.

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 following the 2008 crisis.

The 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.

Britain’s 12-month inflation rate accelerated in September to 3.0 percent — the highest level for more than five years, recent official data showed.

Around eight million Britons have never seen an interest rates rise in their adult lives, experts say, with rates languishing at rock-bottom lows after the country fell into a deep recession.

– Burden on households –

Retail banks tend to pass on any change in the BoE rate to its customers. The increase to 0.50 percent is now set to raise repayments for borrowers and therefore stretch household budgets already under pressure from weak wage growth amid low unemployment in Britain.

However, it should boost savers via higher rates of return.

Britain is on course to depart from the European Union in March 2019 — but London remains locked in tough exit negotiations with Brussels.

The BoE meanwhile refrained Thursday from altering its quantitative easing (QE) or cash stimulus policy, which it launched to encourage commercial lending and bolster growth after the financial crisis.

That was in contrast to the European Central Bank, which last week began weaning the eurozone economy off the high doses of support it had prescribed in recent years.

From January, the Frankfurt institution will reduce its purchases of government and corporate bonds to 30 billion euros ($35 billion) a month, from 60 billion euros at present.

In the US meanwhile, the Federal Reserve kept its benchmark interest rates unchanged Wednesday, but analysts expect it to rise again in December. It has already lifted borrowing costs twice in 2017.

AFP

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