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2 November 2017
 |
UK (The Total Investment & Insurance
Solutions)
The Bank of England has raised interest rates for the first time in a
decade to contain an increase in inflation stoked by the Brexit vote, in what
is otherwise a moment of high uncertainty for the economy.
In a statement Thursday, the bank said it had
lifted its benchmark rate, which affects the cost of loans and savings rates in
the wider economy, to 0.50 percent from the record low of 0.25 percent.
The hike, which had been widely anticipated
in financial markets, is the first since July 2007, when world credit markets
started to freeze up in what would prove to be the prelude to the global
financial crisis.
However, the impact on households and
companies will likely be modest, as 60 percent of home-owners are on fixed-rate
mortgages and the cost of borrowing remains very low by historical standards. A
decade ago, for example, the key rate was hiked to 5.75 percent.
Minutes of the meeting showed that seven
members of the nine-strong Monetary Policy Committee judged it
"appropriate to tighten modestly the stance of monetary policy" to
return inflation to target.
Inflation, according to the central bank's
quarterly projections, should fall towards target, to 2.1 percent, in three
years — if interest rates rise in the way markets expect, to 1 percent over
that period.
Despite the hike, the majority on the bank's
committee argued that "monetary policy continues to provide significant
support to jobs and activity in the current exceptional circumstances" and
that future increases should be gradual and limited.
"In many respects, the decision today is
straightforward: with inflation high, slack disappearing, and the economy
growing at rates above its speed limit, inflation is unlikely to return to the
2 percent target without some increase in rates," said Bank of England
Governor Mark Carney.
In spite of that backdrop, rate-setters were
faced with a dilemma as the British economy has come off the boil. It is the
slowest-growing among its peers in the Group of Seven industrialized
democracies and businesses and households are becoming more cautious amid
uncertainty over Britain's future relations with the other 27 EU nations.
It's largely because of the uncertainty
surrounding Brexit that few in financial markets think the Bank of England will
swiftly follow up this rate hike with another. The pound slid on Thursday,
trading 0.8 percent lower at $1.3125 and 1.1 percent at 0.8866 euro.
"The cautious comments in the
accompanying statement have led many to believe that this is a case of
one-and-done rather than the start of a sustained hiking cycle," said
David Cheetham, chief market analyst at XTB.
All that could change, Carney indicated, if
Britain is quick in getting a Brexit deal with the remaining 27 EU nations.
Though Britain is officially due to leave the EU in March 2019, there is
mounting pressure on the government to provide businesses with some clarity on
the future following Brexit day. Many financial firms, for example, have
threatened to start implementing contingency plans to set up operations in
Europe or move staff and activities in the early months of next year if there
is no progress in the Brexit talks.
"Of course, these are not normal
times," Carney said. "Any resolution of the uncertainty about the
nature of, and transition, to, the U.K.'s future relationship with the EU
insofar as it affects the behavior of households, businesses and financial
market participants would prompt a reassessment of the economic outlook."
Brexit, he added, is the "biggest
determinant" of the British economy's outlook.
Inflation has been boosted in the past year
by the pound's 15 percent fall since the Brexit vote in June last year, which
raised the cost of imported goods like food and energy. That impact is a
one-off, the bank conceded, and is likely to fade in coming months while higher
wages and productivity grow.
For two of the rate-setters, Jon Cunliffe and
Dave Ramsden, there was insufficient evidence that domestic factors like wage
increases would be as strong as anticipated, and that's why they voted to keep
rates on hold. Ramsden would not be drawn on his decision to keep rates on
hold.
Though the rate rise may not amount to much,
it has symbolic value.
"For a whole generation of U.K.
households now entering adulthood, it's a small but important reminder that
interest rates can move in an upward direction, even if only slowly," said
Lucy O'Carroll, chief economist at Aberdeen Standard Investments.
While the rate hike may stretch some
household budgets, it will be welcome to savers, who have seen returns sharply
diminished in the era of super-low interest rates. Nationwide Building Society,
one of the country's biggest financial institutions, said it will pass on the
full quarter-point rise to savers.
Carney said he expected banks to follow suit,
noting that they passed on last year's rate cut.The Total Investment & Insurance Solutions
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