Bank of England raises rates to 4% in first hike in over three years

The Bank of England raised interest rates on Thursday, lifting its benchmark rate from 3.75% to 4%, its first increase in over three years. The central bank also warned that at least one more increase is likely if the US-Iran conflict continues, suggesting Britain's tightening cycle may only just be beginning.

An 8-1 vote — the disagreement was over how much to hike

The Monetary Policy Committee voted 8-1 in favour of the increase. The sole dissenter, Catherine Mann, did not oppose a hike itself — she argued it should have been bigger, voting for a half-point rise to 4.25%. The direction of the dissent ran against expectations in a Reuters poll, which had expected any dissenter to vote to hold rates.

Inflation seen near 5% by the middle of next year

In its latest forecast, the Bank said British inflation is likely to reach around 5% in the middle of next year, more than double its 2% target. The Bank said persistent price pressures require action to rebuild confidence in its grip on inflation. Mann said last month that the Bank had been slow to reassure markets that it had inflation under control.

Growth forecasts revised up, beating official expectations

Despite the hike, the Bank turned more optimistic about the economy. It revised up its growth expectations to 1.6% this year and 1.3% next year — notably stronger than the forecasts published last week by the government's Office for Budget Responsibility. The Bank said the British economy had proved more resilient than expected.

Pressure on households and the new prime minister

The hike hits British households directly: payments on variable-rate mortgages and other borrowing will rise, while returns on savings may edge up. For Prime Minister Andy Burnham, who took office pledging to ease cost-of-living pressures, a forecast of inflation near 5% is a blow. The Bank noted Britain has now started on a path its main peers have already embarked on, and the future course of rates will depend on inflation data and developments in the Middle East.

(Source: Reuters)