By Jason Douglas and Paul Hannon
The Bank of England raised its benchmark interest rate Thursday, a telegraphed move that represents the latest small but significant 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 two more increases are likely through the end of 2020. The British pound and U.K. government bond yields fell sharply in the wake of the decision.
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 U.K., though, is lagging behind. BOE officials say that's a consequence of the uncertainty generated by last year's vote to leave the European Union. 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.
"The decision to leave the European Union is having a noticeable impact on the economic outlook," the bank's Monetary Policy Committee said. "Uncertainties associated with Brexit are weighing on domestic activity, which has slowed even as global growth has risen significantly."
The rise in the benchmark rate, the first time the BOE has increased interest rates in a decade, is aimed at restraining inflation in an economy that will struggle to grow as fast as its peers as long as that shift is underway, officials said.
The BOE 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.
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.
In its statement, the BOE said it expects annual inflation to be around its 2% target in three years provided interest rates rise gently in line with investors' expectations. Short-term rates in financial markets imply that investors believe the bank will raise interest rates twice over the next three years, to reach 1% by the end of 2020.
Write to Jason Douglas at [email protected] and Paul Hannon at [email protected]