BoE interest rate up for first time in a decade but pound falls
The Bank of England yesterday raised interest rates for the first time in more than 10 years, but warned that it expects only "very gradual" increases in the run up to Brexit in 2019.
A rate rise would normally boost the pound, but the note of caution about future increases sent sterling down sharply.
After initially rising, sterling suffered its worst one-day drop against the euro in more than a year, hitting 89.37 pence. But after a decade without a rate increase, the market may take some time to properly price the impact of the latest move.
Bank of England rate-setters, led by governor Mark Carney, voted seven to two to increase the UK's standard interest rate to 0.50pc from 0.25pc.
The interest rate was reduced last year to boost the UK economy in the immediate wake of the Brexit vote.
The economy remains vulnerable to the same Brexit effects, but yesterday's vote split reflects the dilemma facing Mark Carney.
Britain's economy has grown slowly this year, but the weak pound has hurt consumers by boosting inflation at a time when wage growth is failing to keep up.
Mr Carney said that in broad-brush terms, the central bank was on the same page as investors who expect only two more 25 basis-point rate hikes before the end of 2020. It means a reversion of rates to anything like historic norms is years off.
Nonetheless, he cautioned investors not to be too relaxed as inflation was still on course to exceed the BoE's 2pc target in three years' time.
"We in fact need those two additional rate increases in order to get that return of inflation to target," Mr 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 Mr Carney fears that Brexit will aggravate Britain's weak productivity growth and make the economy more inflation-prone.
He 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.
Yesterday's move meant the BoE followed through on its signal in September that a rate hike was coming.
That may go some way to help counteract Mr Carney's reputation - in the words of one British politician - of being an "unreliable boyfriend" who did not live up to previous guidance about higher rates.
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.
The BoE said debt servicing costs paid by British households and companies remained "historically very low", even with the new higher rate.
Economists polled by Reuters had overwhelmingly predicted a hike yesterday, although nearly three-quarters of them thought it was too soon to make such a move. (Additional reporting Reuters)