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UK Central Bank Raises Rates for First Time in a Decade

UK Central Bank Raises Rates for First Time in a Decade
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Thursday, 02 November 2017 08:10 AM

The Bank of England has raised interest rates for the first time in a decade as it seeks to contain a rise in inflation stoked by last year's Brexit vote in what is otherwise a weakened economy.

In a statement Thursday, the bank said it had increased 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 the 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.

Rate-setters were faced with a dilemma during their deliberations. Inflation is running a full percentage point above the bank's target rate of 2 percent largely — caused by the 15 percent fall in the pound since the Brexit vote — and unemployment stands at its lowest level since the mid-1970s. But the British economy has come off the boil in recent months as businesses and households take a more cautious stance amid the uncertainty of Britain's future with the other 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.

For now, the Bank of England's Monetary Policy Committee opted to look past those concerns by taking back the rate cut they pushed through in the aftermath of the Brexit vote to support the economy through the uncertainty and market turmoil of the time.

The main reason for the spike in inflation is related to the pound's plunge following the Brexit vote. That has caused a jump higher in the cost of imported goods, notably food and energy.

Under normal circumstances, above-target would be more than enough reason to raise the cost of borrowing; higher interest rates can push up a currency, thereby dampening inflation by lowering import costs, and can also help cool an overheating economy.

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.

Lenders are set to tweak their flexible mortgage rates to take account for the increase in the base rate. However, with more and more people taking out longer-term fixed-rate mortgages, the impact on household spending is not expected to be substantial.

Though the rate hike may be irksome to some, it will be welcome to those with savings, who have seen the returns on their capital sharply diminished over the past decade. Nationwide Building Society, one of the country's biggest financial institutions, said it will pass on the full quarter-point rise in the key interest rate to its savers.

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The Bank of England has raised interest rates for the first time in a decade as it seeks to contain a rise in inflation stoked by last year's Brexit vote in what is otherwise a weakened economy.In a statement Thursday, the bank said it had increased its benchmark rate,...
bank, england, central, rates
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2017-10-02
Thursday, 02 November 2017 08:10 AM
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