The Bank of England just announced that they are raising key interest rates.
Bank of England policy makers raised interest rates for the first time in a decade, yet expressed concern for Britain’s Brexit-dented economy by indicating that another increase isn’t imminent.
Led by Governor Mark Carney, the Monetary Policy Committee voted 7-2 on Thursday to increase the benchmark rate to 0.5 percent from 0.25 percent. The minutes of their meeting underscored worries that the economy is fragile as the 2019 split with the European Union nears.
Crucially, policy makers omitted language from previous statements saying that more hikes could be needed than financial markets expect. That implies that officials are comfortable with pricing for two more quarter-point increases, roughly one by late next year and another in 2020.
The more dovish outlook than investors anticipated pushed the pound down nearly 1 percent against the dollar to as low $1.3096 and gilts rose. U.K. money markets pushed back expectations for the next shift to September 2018 from August 2018 previously.
“Interest rates are likely to rise only very gradually over an extended period of time,” said Colin Ellis, managing director for credit strategy at Moody’s Investors Service. “This benign outlook for interest rates differs from past monetary cycles, when policy rates rose more swiftly and more sharply after they reached their previous floors.”
Thursday’s decision removes the emergency stimulus introduced in the wake of last year’s EU referendum. It will push against the fastest inflation in five years, boosted by a weaker currency and the lowest unemployment rate in four decades.
Inflation is now running a full percentage point above the bank’s 2 percent target. The dilemma for the central bankers is that underlying price pressures aren’t stemming from stronger demand, but flaws in the economy aggravated by Brexit, namely weak productivity.
“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.”
The decision to hike comes after multiple false alarms from Carney since he took over as governor in 2013, most notably in 2014 when his whipsawing of investors led to him being tagged an “unreliable boyfriend.”