Bank of England hikes rates for first time in a decade

A worker walks past the Bank of England in the City of London on Wednesday. (Reuters photo)

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 over the next three years.

The BoE said its nine rate-setters voted 7-2 to increase its benchmark Bank Rate to 0.50% from 0.25%, 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.

However, sterling fell around a cent against the US dollar and government bond yields dropped by 5 basis points as markets homed in on the BoE’s cautious approach to future rate rises. The BoE did not repeat previous language about markets underestimating the extent of future rises.

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 favour 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.

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