Monetary policy committee lifts cost of borrowing to highest level since 2009.
The Bank of England has raised interest rates above the emergency level introduced straight after the financial crisis, despite mounting fears about the economic impact of Britain crashing out of the EU without a deal.
Signalling the gradual return of higher borrowing costs, Threadneedle Street raised interest rates to 0.75% from 0.5% – the level they were dropped to in March 2009 as the economy lurched through the last recession.
The Bank’s nine-member monetary policy committee voted unanimously for the increase, judging the economy had bounced back from a soft patch earlier this year triggered by the freezing weather and heavy snowfall from the “beast from the east”.
While warning Brexit could blow the economy off course, the MPC said recent readings for economic growth “appear to confirm that the dip in output in the first quarter was temporary, with momentum recovering in the second quarter”.
The rate setters added that if the economy continues to recover as forecast, an “ongoing tightening of monetary policy” – meaning more interest rate rises – would be required to return inflation towards the Bank’s 2% target over the next few years.
Having made the call to move interest rates for only the third time in the past decade, the Bank’s latest decision comes amid growing fears over Brexit, with Theresa May facing parliamentary divisions over her plan.
Raising interest rates will mean higher borrowing costs on mortgages and loans for hard-pressed consumers and businesses as they adapt to Britain leaving the EU.
An extra 0.25% interest will add £12 a month to a £100,000 repayment mortgage and £25 on a £200,000 loan. However, nearly 70% of homebuyers have fixed-rate mortgages, so will be unaffected.
Some economists had urged the Bank to keep rates on hold to help support jobs and growth amid the uncertainty.
Mark Carney, the Bank’s governor, had previously said it could use an emergency rate cut in the event of no deal. While Threadneedle Street has a mandate to steer inflation towards 2%, it can deviate to support the economy through difficult periods.
However, factory output has slowed amid softer global economic growth, as Donald Trump has slapped import tariffs on some of the US’s biggest trading partners, including the EU and China. Despite the low levels of unemployment in the UK, pay rises for British workers also remain elusive.
But in giving its verdict for higher rates, the MPC said it believed wages should begin to rise over the next three years, helped by the low levels of unemployment, while economic growth should average around 1.75% per year.