Bank of England hikes rates for first time in a decade,
sees only gentle rises ahead
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[November 02, 2017]
By David Milliken and William Schomberg
LONDON (Reuters) - The Bank of England
raised interest rates for the first time in more than 10 years on
Thursday and said it expected only "very gradual" further increases
would be needed over the next three years.
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 the emergency cut
made in August 2016, shortly after the shock decision by British voters
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, which tipped Britain
into its deepest recession in decades.
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 is too
weak to justify a rate rise now.
But most MPC members, including Governor Mark Carney, decided it was
time to start to tighten policy, despite the British economy's sluggish
performance this year.
"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.
The BoE said debt servicing costs paid by British households and
companies would remain "historically very low" despite Thursday's hike.
At its previous meeting in September, the Monetary Policy Committee had
voted 7-2 in favor of keeping rates on hold. But it warned then that
rates could rise "over the coming months".
Economists polled by Reuters had overwhelmingly predicted a hike at
November's meeting, although nearly three-quarters of them thought it
was too soon to make such a move, given the deep uncertainties about
Brexit and weak wage growth.
The split on the MPC reflects the dilemma facing the central bank.
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The Bank of England is seen in the City of London, Britain November
1, 2017. REUTERS/Toby Melville
On the one hand, Britain's economy has grown only slowly this year as a jump in
inflation caused by the slump in the value of the pound after the Brexit vote
pinched spending by consumers. Also, companies are offering sub-inflation pay
increases to their staff.
The central bank said the decision to leave the EU was already having a
"noticeable impact" on the economic outlook.
But it downgraded its estimate of how fast the economy could grow without
generating excess inflation, justifying its decision to raise rates.
Consumer price inflation hit a five-year high of 3 percent in September - mostly
due to the fall in the value of the pound - and the BoE said it expected it to
peak at 3.2 percent in October. The lowest unemployment rate since the 1970s and
an expected improvement in lackluster productivity growth suggested pay growth
was about to rise, the BoE added.
The BoE said it expected inflation to fall back to close to its 2 percent target
only if Bank Rate rose in line with the "gently rising" path implied in
This would mean rates hit 1 percent by 2020, with one increase of a quarter of a
percentage point likely next year, according to detailed forecasts in the
The BoE will be following the path taken by other central banks.
The U.S. Federal Reserve has already raised rates from their post-crisis lows
and the European Central Bank is signaling a shift away from its huge stimulus
for the euro zone economy.
The BoE said it now expected Britain's economy would grow by 1.6 percent next
year and by 1.7 percent in 2019, unchanged from its forecast made in August and
in line with a new, slower, sustainable rate.
Before the financial crisis, Britain's economy typically grew by more than 2
percent a year.
Carney is due to give a news conference to explain the Bank's latest Inflation
Report at 1230 GMT.
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