Bank of England raises interest rates to highest level since 2009

Policymakers expect tight labour market to push up wage growth

The Bank of England move was widely expected. Photograph: Reuters

The Bank of England move was widely expected. Photograph: Reuters

 

The Bank of England has raised interest rates to the highest level in almost a decade, saying recent data vindicated policymakers’ view that the first quarter slowdown in UK growth was temporary.

Members of the Monetary Policy Committee voted unanimously for a 25 basis point increase, which takes the Bank of England’s benchmark interest rate to 0.75 per cent, the highest since the onset of the global crisis.

The outcome was widely expected, with markets pricing in the quarter point rate rise almost fully in the run-up to the meeting.

Rate-setters argued there is very little spare capacity left in the UK economy, with low productivity and lower net migration holding back potential growth, so that even modest increases in demand would lead to domestic inflationary pressures.

Tight labour market

Policymakers reckon a tight labour market will push up wage growth and further rate rises - although “at a gradual pace and to a limited extent” - will be needed to bring inflation sustainably back to its 2 per cent target.

The Bank of England has resisted calls for it to give greater clarity than this on the future path of rates. However, its forecast for inflation - essentially unchanged from May - is conditioned on market expectations for the path of interest rates. Market pricing when the forecasts were drawn up suggested a slightly slower pace of tightening than in May. – Copyright The Financial Times Limited 2018