UK interest rates to rise for 1st time in a decade

- Associated Press, LONDON
It will be the first hike since July 2007, when world credit markets started to freeze up

Nov 1, 2017-The Bank of England is on Thursday set to raise interest rates for the first time in a decade in order to keep a lid on inflation, a move that has the potential to hurt the British economy just as it struggles with the uncertainties of Brexit.

The central bank is expected to lift its main interest rate by a quarter percentage point from the record low of 0.25 percent, taking back the cut it made in the aftermath of last year’s Brexit vote to support the economy through the market turmoil of the time.

If it delivers the cut, as bank Governor Mark Carney has indicated, it would be its first hike since July 2007, when world credit markets started to freeze up in what would prove to be an early phase of the global financial crisis. 

The main motivation behind an increase is to bring down inflation, which is running above the bank’s target of 2 percent by a full percentage point and making life more expensive for households. Any further rise from the current annual rate of 3 percent would require Carney to write to Treasury chief Philip Hammond explaining why inflation is running more than a percentage point above target and what he and his colleagues on the nine-member Monetary Policy Committee are planning to do about it. The reason for the spike in inflation is simple: Brexit. The pound plunged following the vote in June last year to leave the European Union, and now trades about 15 percent lower against a range of currencies. That has caused a spike higher in the cost of imported goods, notably food and energy. 

Under normal circumstances, that would be more than enough reason to raise the cost of borrowing; higher interest rates can push up a currency, thereby dampening inflation by lowering import costs, and can also help cool an overheating economy.

The dilemma for the Bank of England is that the British economy isn’t showing any signs of overheating. Though unemployment stands at its lowest level since the mid-1970s and the main stock market in October hit a record high, the British economy is growing by less than any of the Group of Seven industrialised nations.

“Higher rates will be an unhelpful influence at a time when the economy is still struggling,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

Though economic growth in the July-September period was slightly better than expected at a quarterly rate of 0.4 percent, the British economy has fared worse than the likes of Germany, Japan and the United States this year. Wages are also not rising as much as prices, meaning household finances are getting stretched, while credit growth has eased back over the summer. And inflation, in any case, is forecast to fall back next year as the lower pound’s influence drops out of the annual comparison.

The worry is that by raising interest rates now, the Bank of England could further hobble an economy that’s trying to steer the choppy waters of Brexit. 

Published: 01-11-2017 10:35

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