Bank of England raises interest rates with unanimous vote | City A.M.
The Bank of England’s monetary policy committee (MPC) has voted unanimously to raise interest rates for the first time since before the financial crisis.
Governor Mark Carney led the first unanimous vote to raise since May 2007, with bank rate, the main interest rate, moving up by 0.25 percentage points to 0.75 per cent, while keeping other measures unchanged.
Markets had priced an increase as a near certainty, but most City economists had expected some dissent within the nine-member committee. The hike was the second within the last 12 months, after November’s reversal of a post-Brexit-vote emergency cut.
Minutes from this week’s monetary policy meeting, published today, showed the Bank judged that weakness in the first quarter was indeed “temporary” and that the “labour market has continued to tighten”.
The Bank’s economists noted that Brexit issues remain the “main challenges” for forecasters, while the threat of a global trade war has already had an “adverse effect” on the world economy. Nevertheless, the Bank slightly upgraded its growth predictions for the UK economy. GDP growth is expected to rise to 1.8 per cent in 2019, above the 1.7 per cent expected in May.
The Bank’s determination to raise rates has been prompted by its belief that inflation will build in the coming months as low unemployment prompts employers to increase wage offers.
Inflation has remained above target for 17 consecutive months, with the Bank today upgrading its predictions on consumer price index (CPI) inflation. Inflation is now expected to rise to 2.5 per cent in the next quarter before falling to 2.2 per cent in 2019, and 2.1 per cent a year later – all 0.1 percentage points above previous forecasts.
Meanwhile, unemployment is predicted to fall below four per cent by the third quarter of next year – yet another four-decade low, below estimates of the point at which inflationary pressures will rise.
The Bank also for the first time gave its estimate of r*, the equilibrium interest rate at which monetary policy is neither contractionary or expansionary. In real terms the trend rate has fallen in the Bank’s calculations from between 2.25 per cent and 3.25 per cent to between zero and one per cent.
Adding the Bank’s two per cent inflation target, the analysis implies that bank rate will only return to between two and three per cent in the longer term, rather than the five per cent seen before the crisis.
Market interest rates used for the Bank’s forecasts imply bank rate will rise to 1.1 per cent by the third quarter of 2021, slightly lower than the 1.2 per cent implied in May.
The meeting was the last for Ian McCafferty, the former chief economist at the Confederation of British Industry who has called for interest rates to rise for the longest of any of the current MPC members.