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Bank of England paves way for first rate hike in a decade

Reuters  |  LONDON 

By David Milliken and William Schomberg

(Reuters) - The of said it was likely to raise in the coming months if the economy and price pressures keep growing, giving its clearest signal to date that Britain's first in a decade is approaching.

The said its tolerance for above-target inflation was lessening even if Britain's departure from the European Union remained a risk. Data this week showed prices rising faster and unemployment falling to a four-decade low.

Policymakers voted 7-2 on Thursday to keep rates on hold at a record-low 0.25 percent, as expected.

But the new guidance from the pushed sterling to a one-year high against the Investors priced in a more than 50 percent chance of a before the year's end.

The said the economy now looked closer to running at full capacity as employment rose and wages picked up, boosting inflation pressures.

If this continued, most of its policymakers felt "some withdrawal of monetary stimulus was likely to be appropriate over the coming months," it said.

Governor Mark Carney said he was among the rate-setters who felt the balance of risks for the economy was shifting away from a Brexit slowdown and towards rising inflation, meaning the chance of a had "definitely increased".

"I would describe (a in) November as being live," Nomura economist George Buckley said.

Other economists said they still thought the was in no hurry, given the slowdown in Britain's economy this year and the doubts about what leaving the EU in 2019 will mean.

"We see this as an attempt to shake markets out of their complacency after the failure of previous, subtler, attempts," Andrew Goodwin, an economist at Oxford Economics, said.

BREXIT DILEMMA

The Brexit vote has put the in a dilemma. On the one hand, it wants to support the economy through its EU divorce, leaving it behind other central banks raising such as the U.S. Federal Reserve.

But at the same time, it needs to keep a grip on inflation which rose sharply after the Brexit vote weakened the pound.

The has previously suggested a was nearing only to be caught out by surprises in the economy, earning Carney the epithet of "unreliable boyfriend" from a politician.

Indeed, the said on Thursday there were "considerable risks" to the outlook, including Brexit.

Next week Prime Minister Theresa May is due to give a speech on Brexit and her Conservative Party holds a conference in October. May will also attend an EU summit next month.

Economists at Citi said there still hurdles in the way of a "If these events pass without significant effect on economic confidence, if inflation exceeds 3 percent in October and if the labour market continues to tighten, a 25 basis-point could become a reality for November," they said.

Most economists had been expecting a first by the only in 2019, according to a poll last month.

BETTER THAN EXPECTED?

The said on Thursday that the economy had done a bit better than expected since its policymakers met in August, but it was unclear how sustained any increase in growth might be.

Inflation was likely to rise further above its 2 percent target and exceed 3 percent in October, slightly more than previous forecasts, after reaching 2.9 percent last month.

Most economists judge that wage growth is still weak at 2.1 percent year-on-year in July. But the surprised many of them, saying pay was rising at an annualised rate of 3 percent when measured over a shorter period. Furthermore, statistical effects might be making pay look too low, it added.

The also said there were signs consumer demand might now be picking up after inflation hurt spending earlier this year.

And it repeated its warning that could no longer grow as fast as it had in the past without causing excessive inflation.

Two policymakers, Ian McCafferty and Michael Saunders, voted once again to raise rates to 0.5 percent to reverse the emergency cut made in August 2016 shortly after the Brexit vote.

Some analysts had expected Chief Economist Andy Haldane to join the dissenters.

Gertjan Vlieghe, who was the first MPC member to vote for a rate cut after the Brexit vote, is due to speak on Friday while Carney will make a speech on Monday.

(Editing by Toby Chopra and Jon Boyle)

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

First Published: Thu, September 14 2017. 21:51 IST
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