BOE Raises Interest Rate to 0.75% in Surprise Unanimous Vote

Bloomberg.com — The Bank of England lifted its benchmark interest rate to the highest since 2009 and policy makers put on a united front to say that further tightening will be needed to rein in inflation.

While the move was widely anticipated, few economists predicted the Monetary Policy Committee to close ranks behind the move with Brexit on the horizon. It unexpectedly voted 9-0 to lift the rate to 0.75 percent, the second quarter-point move since November.

The action is a vindication of Governor Mark Carney’s view back in May — when the BOE held off tightening — that a slump in growth in the first quarter would prove temporary. But increased uncertainty about Britain’s future relationship with the European Union and ongoing global trade tensions could mean that hiking now proves a risky move.

In the Inflation Report accompanying the decision, the BOE cut its forecast for global growth, though its predictions for Britain were broadly unchanged. While U.K. expansion is expected to be just 1.4 percent this year, it will average about 1.75 percent a year through 2020, slightly above the 1.5 percent potential.

If the economy grows as expected, “an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2 percent target at a conventional horizon,” the central bank said. It repeated its phrase that rate hikes will be limited and gradual.

New Forecasts

Similar to the last forecasts in May, the bank’s update on Thursday suggests that about one interest-rate increase a year will be enough. Carney will elaborate on the outlook at a press conference at 12:30 p.m. in London.

The forecasts see inflation slipping to 2.2 percent in 2019 from an average of 2.3 percent this year before settling at the goal in 2020.

The BOE is following the U.S. Federal Reserve in slowly raising borrowing costs from levels that are still at emergency lows a decade after the financial crisis. The European Central Bank is set to end its bond-buying program later this year.

The MPC said that while the Brexit-induced depreciation of the pound has helped exports, the uncertainty about future trade is damping investment. The two effects largely cancel each other out, and prospects for overall growth haven’t weakened. […]