By Jason Douglas and Paul Hannon
The Bank of England raised its benchmark interest rate for the first time in a decade Thursday, a telegraphed move that represents the latest step by the world's major central banks to withdraw crisis-era stimulus.
The BOE lifted its policy rate to 0.5%, from 0.25% previously, and signaled that further tightening would be gradual and limited, indicating just two more quarter-point increases by the end of 2020. The cautious tone resulted in sharp falls for the British pound and U.K. government bond yields.
The move is aimed at restraining inflation in an economy that is struggling to grow as fast as its peers as a result of a long period of weak productivity growth, which has been worsened by the uncertainties that have followed the June 2016 vote to leave the European Union.
"The pace at which the economy can grow without generating inflationary pressures has fallen relative to pre-crisis norms," said Mark Carney, the BOE's governor. "Over the next few years, modest demand growth is expected to use up the little spare capacity remaining in the economy. Domestic inflationary pressures are likely to build."
Inflation was 3% in September, above the bank's 2% target.
The U.K. central bank's move comes a day after the U.S. Federal Reserve signaled that it is poised to raise short-term interest rates for the fifth time since 2015 next month, and a week after the European Central Bank confirmed that it will begin to dial back the pace of its bond-buying program in January.
The U.S. and eurozone economies are growing at their healthiest rates for years, part of a synchronized upswing that has taken hold for the first time since the global financial crisis.
"The global economy is firing on most cylinders, it's doing very well," Mr. Carney told a news conference. "It's not surprising that the stance of policy is changing. The U.K. is participating a little less in this global upswing. We are going through a relatively unusual period of underperformance."
BOE officials say that's a consequence of the uncertainty generated by the Brexit vote. Negotiators from London and Brussels are due to meet for fresh divorce talks Nov. 9 and 10. The U.K. is scheduled to leave the EU in March 2019.
In a statement, BOE officials reiterated their view that Brexit will likely weigh on the economy for years to come as Britain reorders its economic and commercial ties to the bloc and the wider world. It said that uncertainty around Brexit is weighing on investment and putting off would-be immigrants, reducing the speed at which the economy can grow without pushing up prices.
"Any resolution of the uncertainty about the nature of, and transition to, the U.K.'s future relationship with the EU insofar as it affects the behavior of households, businesses and financial market participants would prompt a reassessment of the economic outlook," said Mr. Carney.
In their quarterly set of economic forecasts published Thursday, officials estimated the U.K.'s potential growth rate at around 1.5% a year -- sharply lower than the 2% to 2.25% growth rate the economy tended to enjoy before the global financial crisis.
Proponents of Brexit say the U.K. will flourish after exits the EU and can pursue its own policies on trade and regulation.
Thursday's rate increase reverses a cut implemented as part of a package of stimulus measures implemented in August last year in the wake of the EU referendum. The last time the BOE raised its benchmark rate was in July 2007, a decision that was soon reversed as the global financial crisis swept over the U.K.
The BOE's move was opposed by two of the central bank's nine rate-setters. Their dissent wasn't a surprise: Jon Cunliffe and David Ramsden, deputy governors of the central bank, had in recent weeks signaled they felt a rate rise would be premature while wage growth remained weak.
Many analysts who follow the BOE are puzzled that it would change its policy while so much of what will determine the U.K.'s future prospects is in flux.
"The increase in the bank rate is difficult to justify given the ongoing political uncertainty that surrounds Brexit and the slow progress of negotiations between the U.K. and the EU," said Anthony Doyle, a money manager at M&G Investments.
Write to Jason Douglas at [email protected] and Paul Hannon at [email protected]