Bank of England takes slow lane after first rate hike since 2007

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The Bank of England raised interest rates for the first time in a decade on Thursday.

But the central bank's said it expected only "very gradual" further increases as Britain prepares to leave the European Union, sending sterling down sharply.

The BoE’s nine rate-setters voted 7-2 to increase the Bank Rate to 0.50 percent from 0.25 percent, reversing an emergency cut made in August 2016 after the Brexit vote.

It was the first BoE hike since 2007, before the global financial crisis tipped Britain into a deep recession.

However, investors focused on the BoE’s wariness about its next moves, pushing down sterling by its most in five months against a basket of other major currencies. The five-year British bond yield fell by the most since the day after the BoE cut rates last year.

The BoE did not repeat its previous warnings to markets that they were underestimating the extent of future rises.

That echoed the cautious approach taken by the US Federal Reserve and the European Central Bank to attempts to wean their economies off massive stimulus programs.

BoE Governor Mark Carney said that in broad-brush terms, the central bank was on the same page as investors who expect two more 25 basis-point rate hikes before the end of 2020.

Canadian economist Mark Carney, who currently serves as Governor of the Bank of England./ Reuters Photo.‍

Nonetheless, he cautioned investors not to be too relaxed as inflation was still on course to exceed the BoE’s 2 percent target in three years’ time.

"We in fact need those two additional rate increases in order to get that return of inflation to target," Carney told reporters. "If you look closely at the forecast, inflation approaches the target, it doesn’t quite get there, and the economy is likely to be in a position of excess demand."

Britain’s economy slowed sharply this year after the Brexit vote in 2016, raising questions about the wisdom of raising rates now among many economists.

But Carney fears that Brexit will aggravate Britain’s weak productivity growth and make the economy more inflation-prone.

Carney said the Brexit talks were likely to be the biggest factor for the next BoE move on rates, either up or down.

He also said the sheer novelty of a first rate hike created some uncertainty about its impact on the economy, but there was no reason to expect this to be larger than normal.

Thursday’s move meant the BoE followed through on its signal in September that a rate hike was coming.

Newspaper headlines herald the Bank of England's decision to raise in interest in central London, Britain./ Reuters Photo.

The two Monetary Policy Committee members who voted to keep rates steady, deputy governors Jon Cunliffe and Dave Ramsden, said wage growth was too weak to justify a rate rise now.

Economists had overwhelmingly predicted a hike on Thursday, although nearly three-quarters of them thought it was too soon to make such a move.

"It’s a bit of a gamble to hike at a time when the economy is stuttering and nobody knows which way the Brexit dice are going to roll," Dean Turner, an economist at UBS Wealth Management, said.

Howard Archer of economics consultancy EY ITEM Club, predicted rates would rise again only in late 2018.

Source(s): Reuters