UK central bank raises interest rates despite Brexit worries

August 02, 2018 - 7:03 am

LONDON (AP) — The Bank of England raised its main interest rate Thursday for only the second time since the 2008 financial crisis as it weighed a strong jobs market and high inflation against growing concerns about Brexit.

The bank's nine-member Monetary Policy Committee voted unanimously to raise the rate from 0.50 percent to 0.75 percent, the highest level since March 2009. Economists had been expecting the move but believe the central bank will be more cautious about further increases in coming months as Britain's Brexit talks with the EU enter a crucial phase and uncertainty about the future heightens.

Britain's economy is sending mixed signals. Unemployment is at the lowest since the 1970s and inflation is above the 2 percent target, at 2.4 percent. But growth has been weak so far this year, people are not spending much and companies are worried about the lack of progress in Brexit talks, which could see Britain crash out of the European Union without a deal on trade and business ties.

The increase was only the second in more than 10 years, following a hike in November.

Higher rates make loans slightly more expensive, weighing on some mortgage holders and businesses looking for credit to invest. The Bank of England is, like the U.S. Federal Reserve and European Central Bank, trying to gradually unwind the easy-money policies it deployed during the financial crisis to keep the economy afloat.

But while the U.S. and eurozone economies have seen strong growth in the past year, the British economy has wilted under the uncertainties of Brexit. A deal is needed by October so that Britain and the EU have new trade rules in place by March next year, when Brexit actually happens. Both Britain and the EU have hardened their negotiating positions, and companies are worried. Major manufacturers like Airbus have warned they could pull their operations out of the country, and drug maker Sanofi says it stockpiling more medicines in Britain in case of customs trouble during Brexit.

And more broadly, trade disputes between the U.S. and major powers are casting a shadow over the world economy's outlook.

George Brown, an economist at Investec, expects Thursday's rate increase to be the only one this year, as the Bank of England takes a cautious approach. Investors will look for further comments from Bank of England Governor Mark Carney as a news conference.

"We think the bank wants to raise rates in a gradual way and that would be consistent with the next one in February," Brown said.

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