As expected by the market, the Bank of England raised interest rates only for the second time since the financial crisis, to the highest level since 2009, saying recent data confirmed the bank's view that the first quarter slowdown in UK growth was temporary.
Members of the BOE's Monetary Policy Committee voted unanimously for a 25 basis point increase, bringing the BoE’s benchmark rate to 0.75%, the highest since the onset of the global crisis.
While the outcome was widely expected, with the market pricing in the quarter point rate rise fully in the run-up to the meeting well in advance, the surprise was that the decision was unanimous, which adds a hawkish tilt to this decision according to several Wall Street analysts.
The unanimous decision is perplexing because the BOE spent the two years since Brexit to scare the nation just how perilous the economy is. And yet, here they are, with just 8 months left until the final Brexit divorce deadline, to announce how upbeat the central bank is on the country's outlook, and to upgrade its outlook for the coming year.
And it certainly was upbeat: "The MPC continues to judge that the UK economy currently has a very limited degree of slack. Unemployment is low and is projected to fall a little further. In the MPC’s central projection, therefore, a small margin of excess demand emerges by late 2019 and builds thereafter, feeding through into higher growth in domestic costs than has been seen over recent years.”
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% this year, it will average about 1.75% a year through 2020, slightly above the 1.5% potential.
The central bank also said that 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,” and repeated its phrase that rate hikes will be limited and gradual.
Below are Some of the highlights from the full statement:
- Global demand grows at above-potential rates
- Net trade and business investment continue to support UK activity, while consumption growth remains modest
- Demand growth outstrips subdued potential supply growth, and a margin of excess demand emerges, pushing up domestic cost growth
- Domestic inflationary pressures continue to build over the forecast period, while external cost pressures ease
- r*: The BoE has for the first time published it’s r* (equilibrium Bank Rate) which would be the rate at which, if the economy started at a position with no output gap and inflation at target, would sustain output at potential and inflation at the target. The BoE notes that, when adding the BoE’s 2% inflation target to the 0-1% current real term r* rate this gives a nominal estimation for r* in the range of 2-3%.
Furthermore, for those wondering if today's decision was a "one and done", that does not seem to be the case: "The Committee also judges that, were the economy to continue to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon. Any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent."
According to Bloomberg, today's unanimous hike was 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.
He's not out of the woods just yet: while the hike was to be expected, 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.
While GBP popped higher by 60 pips in a kneejerk reaction to the hawkish announcement, the reaction appears muted with investors now focused on Carney's upcoming conference.