BoE raises interest rates but is cautious on further hikes

The BoE's monetary policy committee voted seven to two to raise borrowing costs by a quarter point to 0.5%. But cautious comments on the likelihood of further increases sent the pound down against the dollar.

Governor Mark Carney, who voted for the rate rise, also announced a new "speed limit" for the economy of 1.5%. Faster growth than that will lead to higher inflation, he said.

The committee noted the impact of the vote for Brexit on the economic outlook but it judged that with unemployment at a 42-year low there is little slack left in the economy. The annual rate of inflation was 3% in September, a percentage point higher than the BoE's target.

Carney said the BoE's main job was to keep inflation at around its 2% target and that the committee needed to act.

"It isn't so much where inflation is now but where it is going that concerns us. The message to the people of the UK is that the MPC is doing its job to bring inflation […] back to target while supporting jobs."

The rate rise is the first since July 2007 when Bank rate reached 5.75%. The BoE then cut rates during the financial crisis and they remained at 0.5% from March 2009 until last year. In August 2016, the BoE reduced rates yet again to 0.25% to shore up the economy after the vote for Brexit.

Analysts expected the move after Carney hinted strongly that a rate rise was on the way. But some economists have questioned why the BoE is increasing rates with the economy slowing and Brexit talks in deadlock.

Carney said all members agreed further rate rises would be gradual and limited. The committee removed language from previous statements that said markets could be underestimating the number of future rate increases.

The pound fell in response to the comments, which suggested limited further rate rises over the next few years. Sterling fell almost 1% to as low as $1.3096.

David Cheetham, chief market analyst at online trader XTB, said: "The market is clearly seeing this as a dovish hike and the cautious comments in the accompanying statement have led many to believe that this is a case of one-and-done rather than the start of a sustained hiking cycle."

Carney said he was comfortable with market assumptions that there will be two more quarter-point rises in the next three years.

Defending the rate rise, Carney said the economy had grown at about 1.5% over the past year. With record numbers in work and productivity flat, 1.5% is now the most the economy can expand without stoking inflation, he said.

Wages will start to rise next year as people move jobs and companies pay people more to attract and retain staff in a tight labour market, Carney said.

He said household finances were strong enough to cope with a quarter-point rise and that the economy was still growing despite concerns about Brexit. Only about a fifth of mortgage borrowers have not experienced a rate rise, he added.

"The whole novelty of the first increase creates some uncertainty around its impact but there are reasons to expect it to be no larger than usual," he said.