Sat | Aug 19, 2017

UK central bank surprises with split decision on rate hike

Published:Friday | June 16, 2017 | 6:00 AM

 

The Bank of England is closer to raising interest rates for the first time in a decade than many had expected, with a growing number of its rate-setters appearing worried about a spike in inflation that is eating into the living standards of the British.

At its latest policy meeting on Thursday, the bank kept its main interest rate at a record low of 0.25 per cent. But a surprisingly large number of the members of its Monetary Policy Committee - three out of eight - opted for a quarter-point increase.

The bank is in a bind as its main goal is to control inflation, which at 2.9 per cent annually is far above the official target of two per cent. To bring down inflation it would have to raise rates, which would, however, hurt the economy by making loans more expensive.

The central bank has in the past proved willing to tolerate higher inflation and delay any interest rate increase, especially since the Brexit talks, due to start next week, could increase uncertainty.

But the recent rise in inflation seems to be testing those limits. The minutes of Thursday's policy meeting show that the central bank expects inflation to rise above three per cent by the autumn "and is likely to remain above the target for an extended period".

"The Monetary Policy Committee are clearly concerned over the rapid rise of inflation over recent months, so much so that some decided to break ranks and push for the first rate hike in 10 years," said Jake Trask, research director at payments provider OFX.

The minutes also show concern about a marked slowdown in the economy, consumer spending, the housing market and car purchases as the country prepares for years-long negotiation on its exit from the European Union. So on balance, most of the rate-setters opted to keep the rate at the record low in the hope of keeping credit cheap for businesses and mortgage owners and supporting the economy.

"A rate hike is the last thing the economy needs right now," said Samuel Tombs, economist at Pantheon Macroeconomics in London.

The British pound, which has been volatile in recent months amid the uncertainty over Brexit, jumped in value on the news of the split decision. The prospect of higher rates tends to push up a currency's value.

The pound rose almost a cent, from US$1.2695 to US$1.2781 after the bank's statement.

- AP