Bank of England hikes interest rates for first time since 2009
Officials pointed to falling joblessness, gradually improving rates of pay growth and businesses’ complaints of a skills shortage as evidence the economy is operating at close to its full capacity – a sign interest rates need to edge up to rein in price rises.
The Monetary Policy Committee (MPC) believes the rate rise will help bring inflation back to its 2pc target, from 2.4pc currently.
Rising pay pressures combined with poor productivity growth indicate inflation could stay above target if they do not take action, the MPC indicated.
However this is unlikely to be the start of a long run of interest rate hikes.
The Bank’s forecasts predict that only one more rate rise is needed to bring inflation to 2pc in two to three years’ time.
Markets anticipate this next rise will take place in late 2019 or early 2020, taking the base rate to 1pc.
Even in the much longer-term, interest rates are not expected to get close to the 5pc level which prevailed before the financial crisis. Instead, the Bank believes the ‘equilibrium real rate of interest’ is 0.5pc.
That means in a decade’s time it expects a neutral interest rate – which neither stimulates nor dampens the economy – will be 2.5pc, once the 2pc inflation target is considered.