The Bank of England (BoE) has raised British interest rates for the first time in 10 years.
The 25-basis point rise announced on Thursday took the rate from a record low of 0.25 percent to 0.5 percent. The record low of 0.25 percent had been reached when the central bank cut the rate in August last year.
This 0.5 percent rate had held since the depths of the financial crisis in 2009, and last August cut was part of a three-pronged package of stimulation intended to head off the anticipated negative effects on the economy of the Brexit referendum vote in June.
“The BoE finally pulled the monetary policy trigger and delivered the expected interest rate hike. Given the Monetary Policy Committee (MPC)’s recent markedly more hawkish stance, a failure to follow through with an interest rate hike would have seriously threatened the BoE’s credibility,” Howard Archer, chief economic adviser at EY ITEM Club, a London-based financial data firm, told Xinhua.
“This is especially the case given that there have been a number of past instances where the BoE has indicated that an interest rate hike was on the cards and then failed to deliver one,” Archer added.
MORE RATE RISES SIGNALLED
The BoE signaled in a statement that this rate rise would be the first in a series of increases in the cost of borrowing.
Some economic indicators point to an economy where much of the slack has been taken up.
“With unemployment at a 42 year low, inflation running above target and growth just above its now, lower speed limit, the time has come to ease our foot off the accelerator,” said Mark Carney, BoE governor.
“Future increases in the bank rate would be at a gradual pace and to a limited extent,” he added.
The CPI rate for September, the last available data, is 3 percent, a rate driven up after Brexit referendum last June. The MPC sets monetary policy in order to meet the 2 percent inflation target.
The depreciation of sterling has increased the cost of imports and also raw materials for manufacturers and has fueled the spike in inflation.
Carney said: “We in fact need those two additional rate increases in order to get that return of inflation to target.”
Carney said that this stance to raise rates made the BoE more hawkish than markets whose expectation for a future rate rise “doesn’t quite get there, and the economy is likely to be in a position of excess demand”.
However Archer believed that the central bank may be best advised to be cautious in its path of rate rises.
He said: “This is the first interest rate hike since 2007, and the MPC may well feel a need to sit tight for an extended period to see how consumers and businesses respond.
“While the BoE’s Governor observed in the press conference that consumers and businesses are generally well placed to withstand an interest rate hike, there could still be a significant psychological impact.”
Amit Kara, the chief UK macro-economist at the National Institute for Economic and Social Research (NIESR), an economic think-tank in London, told Xinhua that he expected there would be a series of 25-basis point rate rises at regular six-month intervals to take the bank rate to 2 percent by 2020-21.
Kara said that the UK’s poor productivity performance was a key factor in the BoE’s decision-making, with the UK’s productivity improvement lagging behind that of its developed nation peers since the financial crisis.
Kara said: “(There has been) Lower growth because of productivity, and because of lower productivity we have had a stronger response from the central bank.
“It does seem there is less slack especially if you have not made any adjustment to the productive capacity of the economy.”
The economic conditions have already been affected by the prospect of Brexit, which first influenced policy and economic fundamentals in the immediate wake of the referendum vote in June last year.
The UK is set to leave the European Union (EU) at the end of March 2019, during which time a divorce agreement between the two parties may or may not be reached.
This period of uncertainty is covered by the BoE’s immediate forecasts and it said that it made assumptions as to the progress of Brexit, that Brexit would happen, that it would be smooth, and that it would happen on timetable.
Sam Hill, chief UK economist at Royal Bank of Canada in London said: “Although the formal assumptions on Brexit didn’t change the ‘smooth transition’ is still part of the forecasts, there was again an acknowledgement of the ‘considerable risks to the outlook’ where EU exit is concerned.”