The Bank of England raised its target key rate yesterday, increasing the rate from 0.25 percent to 0.5 percent. The last time the Bank raised rates was in July of 2007 when the key rate increased from 5.5 percent to 5.75 percent.
Since then, rates have fallen repeatedly, with the most recent rate cut being in August 2016, in the wake of the Brexit vote, when the bank claimed the vote created a need for more additional stimulus.
- The Fed: 1.25%
- Canada: 1%
- ECB: -0.4%
- BofE: 0.5%
The stated justification this time, according to Ben Broadbent, Deputy Governor for Monetary Policy at the BofE, is to “get inflation back on track.” Specifically:
Following the referendum, sterling’s exchange rate fell very sharply, that’s pushed up import prices and with it the rate of inflation.
As in Canada, however, there are continued worries that any increase in interest rates could impact indebted Brits:
Around a third of households have owner-occupied mortgages. Interest payments on debt - in aggregate - for households, are lower than they’ve ever been, relative to income, and this is a moderate rise.
In other words, in the UK, as is the case throughout Europe and North America, the household debt burden is no small factor in considering the realities of rate hikes. At the same time, we’re seeing increased urgency in raising rates — with both Canada and the Uk raising rates in the past month — in an attempt to escape the trap which central banks now find themselves in. If a recession appears on the horizon, and central banks are still neear zero percent on their target rates, where will they go to “stimulate” the economy? Thus, raising rates are of increasing importance, but household debt levels may only be managable so long as rates remain remarkably low.
Central banks may be afraid to wait any longer to raise rates at this point, even though they are clearly still concerned that any hike may upset the booms we’re now experiencing. Indeed, it may be that investors are already wise to the game:
Despite the rate rise, the pound fell against the dollar and the euro on Thursday. Financial markets interpreted the Bank’s message about the future of the British economy as being cautious, implying that the pace of future rate rises would be slower than had been expected.
