Bank of England sees only gentle rises ahead after historic rate hike


The Bank of England raised interest rates for the first time in more than 10 years on Thursday but sterling fell sharply as the central bank said it expected only “very gradual” further increases over the next three years.

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The BoE said its nine rate-setters voted 7-2 to increase its benchmark Bank Rate to 0.50 percent from 0.25 percent, reversing an emergency cut made in August 2016, shortly after Britons unexpectedly voted to leave the European Union. 
It was the first time that the BoE increased borrowing costs since 2007, before the eruption of the global financial crisis that tipped Britain into its deepest recession in decades. 
However, sterling tumbled by more than a cent against the dollar and government bond yields plunged as markets homed in on the BoE’s cautious approach to future rate rises. The BoE did not repeat the previous language about markets underestimating the extent of future rises. 
BoE Governor Mark Carney said in “broad brush” terms, the central bank was on the same page as investors. 
He also said the sheer novelty of a first rate hike created some uncertainty about its impact on the economy, but there was no reason to expect this to be larger than normal. 
The outcome of Brexit talks was likely to be the biggest factor driving whether the BoE would raise interest rates again, or cut them, Carney said. 
“We’re going to be in exceptional circumstances for a period of time, certainly until there’s clear resolution of the future relationship (with the EU), and even then, maybe longer than that,” Carney said in a news conference following the decision. 
He repeated a warning about the “speed limit” on how fast the economy can grow without pushing up inflation after years of dire productivity growth. 
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 BoE that wage growth was too weak to justify a rate rise now. 
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“The jury is still out as to whether (today’s decision) is the right one. Looking at the Bank’s motivations, we don’t necessarily agree that it is,” said Dean Turner, an economist at UBS Wealth Management. 
“In our view, it’s a bit of a gamble to hike at a time when the economy is stuttering and nobody knows which way the Brexit dice are going to roll.” 
But despite the economy’s sluggish performance this year, most MPC members, including Carney, decided the timing for a tightening move was right. 
“The MPC now judges it appropriate to tighten modestly the stance of monetary policy in order to return inflation sustainably to target,” the BoE 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.

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