Bank of England hints at rate rise in 'coming months'

AP News
Posted: Sep 14, 2017 2:09 PM
Bank of England hints at rate rise in 'coming  months'

LONDON (AP) — The Bank of England hinted Thursday that it may be ready to raise interest rates for the first time in a decade, possibly as soon as November, in order to keep a lid on inflation, which has shot up since Britain's decision last year to leave the European Union.

In a statement accompanying its decision to keep its key interest rate at the record low of 0.25 percent, the bank warned that borrowing rates could be raised "over the coming months" and sooner than many in financial markets currently think.

That triggered a big jump in the value of the pound to a one-year high against the dollar. In late afternoon trading, the pound was 1.4 percent higher at $1.34, a clear sign that traders are reassessing their predictions of when rates will rise.

Minutes of the policy meeting showed that only two of the bank's nine-member Monetary Policy Committee voted to raise the so-called Bank Rate by a quarter-point to 0.50 percent. The 7-2 decision had been expected in light of a sharp slowdown in economic growth this year.

Still, it's clear that rate-setters face a dilemma, given that inflation is running way above the bank's 2 percent target at 2.9 percent. Under more normal times, that would have been justification enough for a rate hike.

Economic figures this week have highlighted the difficult choices facing the central bankers. While inflation is above target, wage rises remain subdued, meaning that household incomes are being squeezed, a development that should lead to lower growth and inflation.

The minutes to the central bank's decision showed that the majority of the panel is ready to raise interest rates "over the coming months in order to return inflation sustainably to target." Inflation, they warned, could overshoot the target over the next three years.

"All MPC members continue to judge that, if the economy follows a path broadly consistent with the August Inflation Report central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations," the minutes to the meeting said.

However, any prospective increases would be expected to be "at a gradual pace and to a limited extent."

The minutes indicated that the Nov. 2 announcement could be the moment the bank opts to raise rates. The committee, according to the minutes, will "undertake a full assessment of recent developments" in November, when it publishes its quarterly update to economic projections.

Bank of England Governor Mark Carney agreed that the possibility of a rate hike has "definitely increased" but wouldn't specify when that may take place.

"In order to return inflation to that 2 percent target in a sustainable manner, there may need to be some adjustment of interest rates in coming months," he said in a television interview. "We'll take that decision based on the data."

The prospect of an imminent rate hike prompted the sharp rise in the pound. That, incidentally, could help deliver what the bank wants as a higher pound could start to dampen down inflationary pressures in the British economy by making imports cheaper.

"The Bank of England wants to have its cake and eat it," said Aberdeen Standard Investments Investment Manager James Athey.

"There's some fairly strong rhetoric today implying that the Bank could raise rates earlier than people expected ... But the reality is that they aren't going to raise rates particularly soon. So they're playing a game of chicken with financial markets and will keep this up as long as they can."

The pound was battered, falling around 15 percent, after last year's surprise Brexit vote, a move that stoked inflation by making imports more expensive and which the trading community thinks will diminish the country's economic prospects.

Brexit remains the biggest uncertainty surrounding the British economy. Six months after triggering the two-year Brexit process in March, the government and the EU have made little headway in divorce talks. That has amplified fears that the country may leave the bloc with no deal, leading to tariffs being slapped on British goods heading to the continent.