Bank of England increases interest rates to 0.75%

The BoE’s monetary policy committee voted unanimously for a quarter-point rise in borrowing costs to 0.75%. Economists had expected a divided vote after the MPC voted 6-3 for rates to remain unchanged in June.

The decision was predicted by most economists after Governor Mark Carney and other rate setters argued the economy had recovered from a sharp slowdown in the first quarter.

Minutes of the MPC meeting said: “Since the May inflation report, the near-term outlook has evolved broadly in line with the MPC’s expectations. Recent data appear to confirm that the dip in output in the first quarter was temporary, with momentum recovering in the second quarter. The labour market has continued to tighten and unit labour cost growth has firmed.”

The MPC reiterated its guidance that any future rate rises “are likely to be at a gradual pace and to a limited extent”. The pound rose against the dollar from its session low of $1.3068 but was down 0.26% to $1.3093 at 12:22 BST. Against the euro sterling rose 0.14% to €1.1274.

The BoE said the economy would grow at about 1.75% a year over its three-year forecast period – slightly faster than the 1.5% the BoE thinks is the “speed limit” for growth without stoking inflation. Consumer price inflation, which stands at 2.4%, will be above the MPC’s 2% target for most of the forecast period, settling down at target in the third year, the BoE said.

The increase is the second time the BoE has increased rates since cutting to 0.5% in March 2009 when the UK was mired in recession. In November 2017 the MPC reversed an emergency quarter-point cut it made after the 2016 Brexit vote to take rates back to 0.5%.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "The MPC’s economic forecasts haven’t changed much since May and its key guidance phrases are unchanged, but the unanimous vote suggests that the committee’s resolve to implement a tightening cycle has increased."

The BoE has been preparing the market for a rate rise during 2018. After signaling an increase in May the MPC held off to check whether a stagnant first quarter was caused by extreme winter weather or a wider malaise. Growth has picked up since, prompting Carney to say on 5 July that the economy was bouncing back.

With the BoE’s credibility for guiding markets on the line most economists expected the MPC to increase rates despite mixed economic data and confusion over Brexit. But some economists have questioned whether the BoE was wise to raise rates with uncertainty surrounding the economy.

Ian Stewart, chief economist at Deloitte, said: “The Bank has so clearly telegraphed this rate rise that markets would have been shocked had rates been left on hold. The unanimity of the decision probably reflects the view that the UK is, quite simply, running out of spare capacity.

"But sub-trend growth and a cloudy outlook hardly make a compelling case for a higher UK rates. In six months’ time this decision will look either prescient or premature. Either way it is bold move.”

Carney has said he spends about half his time dealing with the potential effects of Brexit on the economy and the financial system. With the March deadline for leaving the EU looming and concerns mounting about a chaotic departure the MPC said Brexit had the potential to derail its forecasts.

The minutes said: “The MPC continues to recognise that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal.”