Bank of England rate hike decision summary

The Bank of England decided to increase the Bank rate by 25 basis points to 0.50% in line with expectations.

Voting pattern was 7-2 for the rate hike with BOE deputy governors Jon Cunliffe and Dave Ramsden dissenting.

BoE said all members agree that any future rate rises expected to be “at a gradual pace and to a limited extent” forecasting only two additional rate hikes in next 3 years.

BoE said that the economic outlook is “broadly similar” to August Inflation report confirming that there are “considerable risks” remaining, including Brexit-related risks.

BoE said that the Inflation report forecast is based on market interest rate assumption of the Bank rate at 0.7% in Q3 2018, 0.9% in Q4 2019, 1.0% in Q3 2020.

Bank of England Governor Carney reasons the move:

CPI is 3% y/y in October heading a bit higher. With the economy growing above its feet, inflation is unlikely to fall lower soon, even as Brexit-related sterling depreciation will dissipate soon.

The UK Exports are well supported by global growth and the weak pound.

Persistently low productivity growth and lower labor availability diminish economic growth relative to the pre-crisis period. Productivity growth has lowered to the extent that current GDP growth is almost purely driven by rising employment and removing the labor market slack.

Real income is squeezed, meaning being negative, and rate hike aims to bring the inflation back to the target

Inflation is getting to the target, but the economy is expected to run above its potential, and the rate hike balances the squeeze in an environment of very little spare capacity.

Carney’s other remarks:

UK Households are well positioned for the rate hike with employment at the all-time high.

UK Inflation is forecast to get back to 2% target in 3-years horizon. Normal horizon to return inflation to target is 18-24 months, but we are in exceptional circumstances after Brexit.

Carney expects bank competition to handle rate hike quickly benefiting savers and to limited effect mortgage borrowers with floating rate fixing.

Global economy is doing well, but the UK growing a bit slower, therefore it is not surprising that when interest rates go up elsewhere, the UK will go higher with rates a bit less.

BoE’s main message is that all we aim is to bring inflation back to the target and to remove the squeeze on real income.