The Bank of England has increased interest rates for the first time since 2007, despite fears for the fragility of the UK economy as its 2019 departure from the European Union nears.
Policymakers on the bank's Monetary Policy Committee (MPC) opted to increase interest rates to 0.5 per cent, up a quarter of a point, by a majority of seven to two.
The bank will reassess the economic outlook once it has more visibility on the nature of the UK's new relationship with the EU after Brexit, and the form that any transition period will take, the bank's governor Mark Carney said on Thursday.
“The impact of Brexit on the forecast will evolve as negotiations progress,” Mr Carney said.
Asked at a press conference whether the rate move might ultimately be viewed as a mistake, Mr Carney said that it was better to think of it as a “nimble response” to an unpredictable set of circumstances.
Once the “big issues” around Brexit have been clarified, policymakers must “step back and assess the new outlook and calibrate policy appropriately”, he said.
Inflation in the UK economy is at 3 per cent, above the bank’s target of 2 per cent, due to the fall in the pound following the Brexit vote.
“A majority of members judged that a small reduction in stimulus was therefore warranted at this meeting to return inflation sustainably to target,” the MPC said.
“Monetary policy would continue to provide significant support to jobs and activity in the current exceptional circumstances.”
However, the UK’s monetary policy path is complicated by the fact upward price pressures aren’t stemming from stronger demand, but flaws in the economy aggravated by Brexit, namely weak productivity.
Annual growth is running at its weakest in four years and the decision to increase rates was taken despite economic growth appearing weaker than before any other increase in borrowing costs in the past 20 years.
Limited and gradual
The bank kept its forecasts for growth and inflation broadly unchanged and sees price gains at 2.2 in three years, slightly above its 2 per cent target. It also reiterated that any future interest-rate increases will be “limited” and “gradual”.
That was followed by a gloomy section in its statement that there are “considerable risks” to the outlook. Brexit featured prominently in the warning, with policy makers saying they’re ready to respond if it affects households, businesses and inflation.
An error message was posted on the UK central bank’s site ahead of the announcement, telling visitors that it was “experiencing a high volume of traffic” and referring users to its Twitter feed for the latest inflation report.
Sterling edged down ahead of the move on Thursday after making gains earlier this week. The dovish language at Mr Carney’s press conference sent the pound slumping 1 per cent to around $1.31.
(Additional reporting: Bloomberg / Reuters)
