BOE raises interest rate for first time in more than 10 years

[LONDON] Bank of England policy makers raised interest rates for the first time in a decade, yet showed concern for Britain's Brexit-dented economy by indicating that another increase isn't imminent.

Led by Governor Mark Carney, the Monetary Policy Committee voted 7-2 to increase the benchmark rate to 0.5 per cent from 0.25 per cent. The minutes underscored worries that the economy is fragile as the 2019 split with the European Union nears.

Crucially, policy makers omitted language from previous statements saying that more hikes could be needed than the markets expect. That implies that officials are comfortable with pricing for two more quarter-point increases, roughly one by late next year and another in 2020.

Thursday's decision removes the emergency stimulus introduced in the wake of last year's EU referendum. It will push against the fastest inflation in five years, boosted by a weaker currency. The additional complication is that underlying price pressures aren't stemming from stronger demand, but flaws in the economy aggravated by Brexit, namely weak productivity.

"A majority of members judged that a small reduction in stimulus was therefore warranted at this meeting to return inflation sustainably to target," the MPC said. "Monetary policy would continue to provide significant support to jobs and activity in the current exceptional circumstances."

The bank kept its forecasts for growth and inflation broadly unchanged and sees price gains at 2.2 in three years, slightly above its 2 percent target. The estimates are based on market projections for the key interest rate reaching 1 per cent over that period.

The bank kept its bond programs unchanged and reiterated that any future interest-rate increases will be limited and gradual.

That was followed by a gloomy section in its statement that there are "considerable risks" to the outlook. Brexit featured prominently in the warning, with policy makers saying they're ready to respond if it affects households, businesses and inflation.

For the doves on the committee, Jon Cunliffe and Dave Ramsden, there was little sign of domestic costs and wages picking up and they saw a chance slack was greater than estimated. But for the majority, the erosion of slack and continued economic momentum justified action.

The rate increase will hit mortgage holders, a fifth of whom have never experienced a BOE rate hike, according to the bank's estimates. The effect will be gradual overall because so many borrowers are tied to fixed rates, it said.

BLOOMBERG