The Bank of England in the City of London, the UK. Picture: REUTERS/TOBY MELVILLE
The Bank of England in the City of London, the UK. Picture: REUTERS/TOBY MELVILLE

London — The Bank of England pushed interest rates above their financial crisis lows on Thursday but signalled it was in no hurry to raise them further with an uncertain Brexit on the horizon.

The BoE’s nine rate-setters were unexpectedly unanimous in their vote to raise rates to 0.75% from 0.5%, the level at which they have spent most of the past decade — apart from 15 months after the Brexit vote, when they were cut even lower.

Economists polled by Reuters had mostly expected a 7-2 vote in favour of raising rates.

The pound almost erased its losses soon after the central bank raised its benchmark bank rate, but was driven lower in subsequent trading.  It traded 0.3% lower at $1.3091 soon after the decision.

 

UK government bond prices rose after BoE governor Mark Carney stressed the gradual path for rate hikes ahead. “Policy needs to walk — not run — to stand still,” he said as he explained a new BoE estimate of neutral interest rates for Britain’s economy, which the central bank believes will rise only slowly against the backdrop of a strong global growth.

 

 

The BoE said Britain’s economy, while growing more slowly than in the past ahead of Brexit, was operating at almost its "speed limit", or full capacity, raising the prospect of more homegrown inflation pressure ahead.

But the message for interest rates remained one of gradual and limited increases as the central bank saw inflation only a fraction above its 2% target over the next few years.

The forecast was based on bets by investors who only expect another rate hike in late 2019 or early 2020, with the Bank Rate creeping up to 1.1% in late 2020.

That was a fraction lower than a projection of rates of 1.2% the last time the BoE published forecasts for the economy in May.

The world’s fifth-biggest economy has slowed since the referendum decision in 2016 to leave the EU. With less than eight months until Brexit, London and Brussels — as well as key members of Prime Minister Theresa May’s Conservative Party — remain far apart on what the future trading relationship should look like.

But Carney said there was a wide range of outcomes for Brexit — most of which would require rates to be at least as high as now — and that the central bank was working on the assumption that there would be a smooth transition. “The mistake is to always wait, wait, wait until you have perfect certainty because we don’t know exactly when that higher degree of certainty is going to transpire,” he said.

The BoE said the economy "could be influenced significantly by the response of households, businesses and financial markets" to news on Brexit.

Carney reiterated there could be “consequences for monetary policy” if Brexit led to a shock for the UK's economy. 

However, the BoE continued to stress that Britain’s economy was at risk of too much inflation even with its slow growth.

The central bank said inflation in two years’ time was likely to be 2.09%.

The BoE said it expected Britain’s economy would grow by 1.4% this year, unchanged from its forecast in May, but it nudged up its forecast for growth in 2019 to 1.8% from a previous projection of 1.7%.

Wages were likely to be growing by an annual 2.5% at the end of this year, a bit slower than forecast in May, before picking up to 3.25% in 2019, unchanged from before.

Several private-sector economists have challenged the BoE’s view that inflation pressures are building, and say raising rates now only risks a U-turn by the central bank if Britain fails to get a Brexit deal.

Bank of England governor Mark Carney has said all bets on future rate hikes would be off if there is a no-deal Brexit.

Some investors think the risk of a global trade war is another reason for the BoE to be cautious.

In its statement on Thursday, the central bank said it saw "tentative signs that actual and prospective protectionist policies were starting to have an adverse impact" on global trade.

It also fleshed out its thinking on how far it is likely to go with its planned rate hikes by publishing a new long-term forecast for what it called Britain’s trend real interest rate, of zero to 1%, more than two percentage points below its pre-financial crisis level.

Adjusted for the BoE’s inflation target, this would imply a Bank Rate of 2%-3% to keep growth and inflation rates stable when the economy is running at full capacity.

In the shorter term, the Bank Rate implied by a so-called equilibrium real interest rate was likely to be somewhat lower, the BoE said but it did not give an estimate.

Reuters and Bloomberg