Five Things You Need to Know Before the Bank of England's Decision

By Jason Douglas Features Dow Jones Newswires

The Bank of England is expected Thursday to lift its benchmark interest rate for the first time in more than a decade. The U.S. Federal Reserve and the European Central Bank have already taken small steps to reduce the stimulus they are imparting to their economies. Here is what you need to know about the BOE decision:

Continue Reading Below

What is expected to happen?

The U.K. central bank is seen raising its benchmark interest rate to 0.5% from 0.25%. The last time the bank raised its policy rate was in the summer of 2007, although it soon reversed course as the first tremors of the financial crisis emerged.

The bank cut it to its current level in August 2016, as part of a package of measures aimed at cushioning the economy from any shocks associated with the U.K.'s decision to exit the European Union.

The central bank is also due to publish its latest forecasts for growth and inflation in the U.K. and Gov. Mark Carney is scheduled to hold his regular quarterly press conference.

What is behind the anticipated move?

Continue Reading Below

A majority of officials on the nine-member Monetary Policy Committee believe the U.K. economy is reaching the limit of how fast it can expand without fueling inflation in excess of their 2% annual target. Unemployment has reached a four-decade low and the economy is growing at a steady if unspectacular pace. Officials say gentle increases in borrowing costs will probably be needed over the next three years to keep price growth in check. They said in September the first move would likely come "within months," a statement that coalesced investor expectations around November's policy meeting.

What role is Brexit playing in the bank's decision making?

The Brexit vote is affecting the economy in multiple ways. The referendum result triggered a fall in the pound that has temporarily pushed inflation above the bank's 2% goal, although that effect is expected to gradually fade. Uncertainty over the U.K.'s future ties to the EU and the wider world appears to be weighing on investment in the U.K. and may be putting off would-be immigrants. The result: BOE officials believe the economy is in for a spell of very weak growth in its ability to produce goods and services without fueling inflation. This supply-side squeeze explains why a majority on the MPC believe higher borrowing costs are needed, even though the economy isn't growing that fast.

Will the bank be 'one and done?'

There is a disagreement between BOE watchers about whether the bank will raise its benchmark rate once before hitting the pause button, or whether a rate increase Thursday will be slowly followed by others in coming quarters. Mr. Carney has pushed back against the idea that raising the main rate to 0.5% would be the bank's only move, although he and others have stressed that any increases in borrowing costs will be gradual and limited.

Write to Jason Douglas at jason.douglas@wsj.com

(END) Dow Jones Newswires

November 02, 2017 02:14 ET (06:14 GMT)