LONDON
The Bank of England opted Thursday to keep interest rates at a record low but delivered a big hint that borrowing rates could be raised sooner than many in financial markets currently think.
In a statement accompanying its decision to maintain its base rate at 0.25 per cent, the Bank of England said its Monetary Policy Committee voted 7-2 in favour of no change. That was in line with market expectations after a run of economic data that has shown the British economy slowing down.
Still, it’s clear that rate-setters faced a dilemma during their deliberations given that inflation is running way above its 2 per cent target at 2.9 per cent. Under more normal times, that would usually be justification enough for a rate hike. However, the majority of the panel urged caution in light of a slowdown in the economy and uncertainty over Britain’s exit from the European Union.
Economic figures this week have highlighted the dilemma. While inflation is above target, wage rises remain subdued, meaning that household incomes are being squeezed, a development that should, all other things being equal, lead to lower inflation.
Despite taking a cautious approach, the minutes to the central bank’s policy decision showed that the panel is ready to raise interest rates.
“All MPC members continue to judge that, if the economy follows a path broadly consistent with the August Inflation Report central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations,” the minutes to the meeting said.
That warning gave the pound a big lift. Soon after the decision it was trading 0.7 per cent higher at $1.33.
