Bank of England raises rates but warns on Brexit

LONDON — The Bank of England found itself in the eye of the Brexit storm once again on Thursday.

The bank voted for the first interest rate hike in 10 years but was quick to make clear the increase wasn’t because it felt particularly good about the long-term outlook for the U.K. economy. It simply could no longer justify keeping rates static, with inflation well above its 2 percent target, unemployment at record lows and an expected pick-up in trade on the horizon as the global economy accelerates.

“In many respects, the decision today is straightforward: With inflation high, slack disappearing, and the economy growing at rates above its speed limit, inflation is unlikely to return to the 2 percent target without some increase in interest rates,” Bank of England Governor Mark Carney said.

However he added: “Brexit will redefine the U.K.’s relationship with our largest trade and investment partner. And it will have consequences for the movement of goods, services, people and capital as well as the real incomes of U.K. households.”

The hike — as with everything else in British politics since the 2016 referendum — was quickly seized upon by politicians of all stripes to bolster their own political arguments on Brexit.

“The Bank of England has had to act to raise interest rates to deal with the spike in inflation caused by the Brexit vote” — Chuka Umunna, Labour MP

“To assume that a long-standing economic problem will become the fault of Brexit reveals more about the bank’s poor record at forecasting than anything else,” Conservative MP and leading Brexiteer Jacob Rees-Mogg told POLITICO.

Chancellor Philip Hammond, however, tweeted that the economy was “strong and resilient,” while John McDonnell, Labour’s shadow chancellor, said the hike reflected a “deep pessimism” about the underlying state of the British economy.

Labour MP and Open Britain supporter Chuka Umunna said Brexit had forced the bank’s hand in raising rates despite a struggling economy, as the steep depreciation of sterling following the referendum has pushed inflation up to 3 percent.

“This news is bad news for mortgage-holders and small businesses up and down the country and is a reflection of how Brexit is already damaging our economy,” he said in a statement. “The Bank of England has had to act to raise interest rates to deal with the spike in inflation caused by the Brexit vote.”

Bad news Brexit

The bank’s own commentary, which accompanied the interest rate announcement, makes it clear that this is not simply a walk-back from the bank’s pessimistic view of Brexit that led to its August 2016 rate cut. Instead the commentary spells out the bank’s view that Britain’s EU exit will damage its economy.

Productivity is set to be suppressed by low levels of business investment and a drop-off in labor supply thanks to tighter restrictions on immigration once Britain leaves the EU. This will create what Carney called a new, lower growth “speed limit” in the U.K., as any slight uptick will push demand above supply, creating inflation.

Business groups expressed disappointment in the decision to go ahead with the hike despite Brexit uncertainties and said they feared future rate rises were yet to come.

“We are focused on making our contribution to making Brexit a success” — Mark Carney, governor of Bank of England

“Our preferred outcome was for a further period of monetary stability, with interest rates steady over the near term. Today’s quarter-point rise may have little effect on most companies, but many will view this as the first step in a longer policy movement — not as a simple reversal of last year’s cut,” said Mike Spicer, the director of economics at the British Chambers of Commerce.

Transition deal

For his part, Carney was keen to stress that the bank’s focus was on doing what it could to get the economy on track for a better Brexit.

“We are focused on making our contribution to making Brexit a success,” he said.

The bank’s next steps are likely going to be heavily conditioned on Brexit developments and how those hit business and consumer confidence, Carney said.

He rejected claims that he is an “enemy of Brexit,” as Rees-Mogg said last week.

The bank’s current forecast is conditioned on the assumption that there will be a smooth transition to a trade deal with the EU, and also builds in a complete cut-off from the single market.

“If there is resolution of some big questions [like a] transition deal, we would expect that will affect how the economy functions and the economic outlook and recalibration of monetary policy,” Carney said.

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