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Abu Dhabi, UAESunday 23 September 2018

Bank of England hikes rates for first time in 10 years

Policymakers voted to raise interest rates by 25 basis points to 0.50 per cent as it seeks to contain Brexit-fuelled inflation

The Bank of England, on guard against soaring Brexit-fuelled inflation, has lifted its key interest rate for the first time since 2007. AFP PHOTO / Daniel Leal-Olivas
The Bank of England, on guard against soaring Brexit-fuelled inflation, has lifted its key interest rate for the first time since 2007. AFP PHOTO / Daniel Leal-Olivas

The UK central bank, battling Brexit-fuelled inflation, lifted its key interest rate to 0.50 per cent on Thursday in the first increase since 2007.

Bank of England policymakers voted by a majority of 7-2 to raise rates by 25 basis points from a record-low 0.25 per cent after a regular gathering, mirroring policy tightening seen in the US and eurozone.

The BoE had cut borrowing costs to ultra-low levels during the global financial crisis in 2008 and beyond. However, it is now mulling a gradual path of monetary policy tightening to combat inflation rising far above the central bank's 2 per cent target.

It said that it expected inflation to fall back over the next year based on a "gently rising path" of its key interest rate. "All members agree that any future increases .... would be expected to be at a gradual pace and to a limited extent," the BoE said in a summary of its decision.

The weak pound since last year’s Brexit referendum has ramped up the cost of goods imported into Britain, and therefore consumer prices. Recent official data showed Britain's annual inflation rate accelerated in September to 3 per cent - the highest for more than five years.

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The quarter-point increase also reverses an emergency rate cut implemented in August 2016 after the shock Brexit vote.

The BoE did not, however, alter its quantitative easing, or cash stimulus, policy, which it first embarked upon to encourage commercial lending after the financial crisis.

This is in contrast to the European Central Bank, which last week began weaning the eurozone economy off the high doses of support they prescribed in recent years.

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

Today’s BoE’s rate rise had been widely anticipated, meaning any market reaction is likely to be muted.

The bank's nine-strong monetary policy committee had hinted at its last meeting in September that a hike was around the corner, despite the big uncertainties about Brexit.

Kathleen Brooks, an analyst at City Index trading group, said that if the bank had failed to increase rates "its credibility could be on the line”.

"The bank has been preparing the markets for this hike for some time," she added.

Opinion is split, however, on whether the hike is a one-off or a sign of things to come.

Allianz Global Investors are looking to sell the pound into a rally, betting that the central bank won’t signal further policy tightening given lingering economic and political risks. Stagnating wage growth, tight household budgets and tough Brexit negotiations are all reasons to believe the BoE will hold fire on further hikes.

Fidelity International has a similar view, while Aberdeen Standard Investments sees scope for more than one increase.

On the other hand, the National Institute of Economic and Social Research predicts the BoE will continue tightening policy over the next few years even as productivity growth slows and Brexit damps momentum.

In a report published on Wednesday, the think tank forecast that the central bank would continue to raise its benchmark rate by a quarter-point every six months until rates reach 2 per cent in the middle of 2021. That’s more than markets are currently expecting and more than the institute forecast in August.

“The reason why we’ve got additional rate increases in our forecast this time is because of the lower productivity profile,” Amit Kara, head of UK macroeconomic forecasting at Niesr, told reporters. “It’s a negative supply shock. You get lower GDP growth, you get higher inflation.”

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