The Bank of England joined the U.S. Federal Reserve and the European Central Bank in removing some crisis-era stimulus Thursday, but signaled it wasn't going to move much further over coming years, a path that may change as negotiations on the terms of the U.K.'s departure from the European Union progress.
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In his news conference, BOE Gov. Mark Carney defended the controversial decision to raise borrowing costs when many Britons are experiencing a decline in real incomes.
Here are five takeaways from the BOE's first rate rise in more than a decade.
The BOE has been signaling for months that it was likely to raise its key interest rate this year, and ever more clearly, given the reluctance of market participants to believe it would do so while the economy adjusted to Brexit. So the move to 0.5% from 0.25% didn't come as a surprise, nor did the number of dissenters on the nine-member Monetary Policy Committee. Deputy Governors David Ramsden and Jon Cunliffe had indicated their unease with an increase in borrowing costs ahead of time. They don't believe wages will pick up as quickly as their seven colleagues do.
A little more to come
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The big question for market participants was how quickly and sharply rates might rise after the first move. The BOE answered that by pointing to the need for just two more increases of the same magnitude by the end of 2020. The pound and gilt yields fell in response.
The BOE's rationale for the move is that the speed with which the economy can grow without generating too much inflation has fallen since the global financial crisis, a trend exacerbated by the uncertainties created by the June 2016 Brexit vote. So the rate rise was needed to keep growth close to the 1.5% speed limit. The BOE has penciled in expansions of 1.7% in 2018 and subsequent years.
Mr. Carney noted that the global economy was "firing on most cylinders," and that the withdrawal of stimulus by leading central banks was therefore to be expected. But he added that the U.K. isn't getting as much out of that pickup as it might have done, thanks to Brexit. That could change if the uncertainties about the way in which the U.K. will leave the EU in March 2019 are resolved, but Mr. Carney kept his options open as to how monetary policy would respond if that were to be the case.
While clearly signaled, the BOE's intention to raise its key interest rate hasn't been universally welcomed, since many Britons are already seeing their real incomes decline and will now have to pay more interest on their debts. Mr. Carney played down the scale of that hit, saying fewer people have mortgages that have a floating rather than a fixed rate. He also said bringing inflation down from 3% now to the central bank's 2% target would help end the squeeze on real incomes, as will an expected pickup in wages.
Write to Paul Hannon at firstname.lastname@example.org
(END) Dow Jones Newswires
November 02, 2017 11:31 ET (15:31 GMT)