Closed Bank of England raises rates in November – as it happened

Bank of England, London

A live blog from FT.com


Welcome to our live coverage of the Bank of England November rate decision. Expectations are that the bank will raise interest rates for the first time since July 2007.


Just a reminder of the order of events today:

The rate decision and forecasts will be published at 12 noon (GMT, followed at 12:30pm by the press conference. The bank rate currently stands at an historic low of 0.25%.


For a bit of context, here’s a chart showing that historic low which Mark has just mentioned:


Expectations of a rate rise for this meeting are sky high. As several members of the monetary policy committee have indicated they now think it is time to take away some of the stimulus provided by the Bank last August.

But if they do hike it will only be start of a new round of questions: how far will they go? How quickly? How will the Bank communicate this strategy?


Here’s the effect those expectations have had in the bond market. The two-year gilt yield fell sharply in the aftermath of last year’s vote to leave the EU, as investors anticipated the Bank’s 25 basis point cut last summer. Since then the yield has remained well below the 0.25 per cent level for most of the past year, but has in recent weeks shifted sharply upwards. This morning it is trading at around 0.5 per cent, suggesting that a hike is almost fully priced.


The pound is weakening going into the BoE announcement.

Sterling has been gaining momentum in the past few days on expectations of a rate hike, and at one stage it was 1.6 per cent higher against the dollar since the start of the week. But it is down 0.3 per cent today, Roger Blitz, FT currencies correspondent reports.


With a rate hike widely expected, it is the nuance around the announcement and Mark Carney’s subsequent press conference which are most likely to attract Bank-watchers’ attention. Our colleague Gemma Tetlow has picked out four things to watch for – including the vote split, forecasts for growth and inflation, and any indications of whether this will be a one-off rise, or the start of a more sustained monetary policy tightening cycle.


The inflation and unemployment figures provide the case for a rate hike. Inflation is just shy of 3.1 per cent, the level at which governor Mark Carney must write a letter to the Treasury explaining why he has missed his 2 per cent target.

At the same time the unemployment rate is at a multi-decade low and below the level the Bank estimates is the long term equilibrium employment rate.

Mr Carney has also argued that the productivity losses after the 2008 financial crisis are now permanent. This means the UK can now sustain a lower level of growth without causing cost pressure for business. So while the economy is slowing this might still mean rates need to rise to keep prices stable.


Not everyone agrees that a rate rise is a good idea, though. Here is the argument against raising rates, from our colleague Martin Sandbu.

The FT editorial argues that “on balance, this is an unnecessary rise”.


Torsten Bell, director of the Resolution Foundation, has written a great analysis of what a rise in interest rates might mean for living standards in Britain and why it may have less of an effect than in the past. Check it out here


Emoticon Bank of England raises rates by 25bps to 0.5 per cent.


The vote was seven in favour to two against.


Jon Cunliffe and David Ramsden dissented.


The markets have initially reacted by dipping slightly. Sterling was trading at around $1.322 just before the decision was published, and dipped to test $1.31. The two-year gilt was at 0.497 per cent just before the hike, and then fell to 0.484 per cent.


From the FT’s economics editor Chris Giles and economics correspondent Gemma Tetlow who have been locked inside the Bank of England this morning:

The Bank of England has increased interest rates by a quarter point to 0.5 per cent and signalled that this first rise in a decade was the start of a gradual process of increasing borrowing costs.

Voting seven to two in favour of the rate rise, the bank’s Monetary Policy Committee forecast that inflation would remain well above its 2 per cent target if they did nothing more and control of prices required two further quarter point rate rises over the next two years.

The BoE forecasts showed inflation broadly under control in the medium term if interest rates rose to 1 per cent by late 2019, but the MPC stressed “future increases in Bank Rate would be expected to be at a gradual pace and to a limited extent”.

With households increasingly having fixed rate mortgages, the BoE said the effect on household budgets of the rate rise was likely to be small and feed through to the economy slower than in the past.

The first monetary tightening in a decade was notable because it came without forecasts of strong UK economic performance. The MPC expects the UK economy will grow at around 1.7 per cent a year over the next three years, well below the 2.5 per cent post Second World War average.

Brexit was already taking a toll on demand, the bank said. “Uncertainties associated with Brexit are weighing on domestic activity, which has slowed even as global growth has risen significantly,” the MPC statement said.

But even this slow rate of growth is still greater than the UK economy can withstand without generating inflation, the MPC added, citing Brexit uncertainties, low productivity growth and limited scope to increase employment rates further.


Our currencies correspondent Roger Blitz reports:

The dovish hike pushed sterling lower. The pound was down by 1 per cent against the dollar and by 1.4 per cent against the euro, falling below $1.31 and down to €1.1240.


Investors are buying UK government debt, with yields on the benchmark 10-year gilt – which were practically flat before the decision – falling more than five basis points (0.05 percentage points) to 1.289 per cent, reports FastFT’s Nicholas Megaw. Lower yields reflect higher prices.


Here is the FT’s Lex team, arguing that “there is no need to be scared” of the rising cost of debt.


Here’s what the Bank of England has to say about Brexit:

As in previous Reports, the MPC’s projections are conditioned on the average of a range of possible outcomes for the United Kingdom’s eventual trading relationship with the European Union. The projections also assume that, in the interim, households and companies base their decisions on the expectation of a smooth adjustment to that new trading relationship.

The decision to leave the European Union is having a noticeable impact on the economic outlook. The overshoot of inflation throughout the forecast predominantly reflects the effects on import prices of the referendum-related fall in sterling. Uncertainties associated with Brexit are weighing on domestic activity, which has slowed even as global growth has risen significantly. And Brexit-related constraints on investment and labour supply appear to be reinforcing the marked slowdown that has been increasingly evident in recent years in the rate at which the economy can grow without generating inflationary pressures.

Monetary policy cannot prevent either the necessary real adjustment as the United Kingdom moves towards its new international trading arrangements or the weaker real income growth that is likely to accompany that adjustment over the next few years. It can, however, support the economy during the adjustment process. The MPC’s remit specifies that, in such exceptional circumstances, the Committee must balance any trade-off between the speed at which it intends to return inflation sustainably to the target and the support that monetary policy provides to jobs and activity


Keith Fray, the FT’s head of statistics, and uur graphics team have pulled together a quick time line of key events over the last 10 years since rates were last raised in July 2007:


FT economics editor Chris Giles points out on twitter that this is the first time the BoE has published a potential output estimate.


Some data comparisons from our head of statistics, Keith Fray:

Since the last rise in Bank rate on 5 July 2007:
GDP is 10.9 per cent higher;
Productivity (output per hour) is 0.5 per cent higher;
Average prices (CPI) are 27.7 per cent higher;
Real pay excluding bonuses is 2.5 per cent lower;
The FTSE 100 is 12.9 per cent higher;
10-year gilts are 4.1 percentage points lower;
$/£ is 68 cents lower;
Unemployment – the rate is 1 percentage point lower;
Employment – the rate is 2.5 percentage points higher – 2.7m more people are in employment.


Here’s how sterling has reacted


Our economics editor Chris Giles tweets:


Our markets editor Michael Mackenzie dissects what the rate rise means for markets. Sterling is lower, government bond prices are rallying and the FTSE 100 is up slightly.


Mark Carney speaking now


Roger Blitz, our currencies correspondent, says:

Market reaction is veering towards the idea that one hike may be as far as the BoE goes in the near to medium term.
Jeremy Cook at payments provider World First points to the BoE’s slightly weaker inflation forecasts and its emphasis on Brexit’ simpact on the economic outlook.
“The MPC couldn’t come out and say ‘this is a one and done hike’ but these comments are hugely unsupportive of arguments that rates need to be higher in the UK to protect against a glut of inflation,” Mr Cook says.
Jane Foley at Rabobank agrees that the dovish tone to the hike was behind the sell-off in sterling. “For now these minutes support the ‘one and done’ view,” she says.
Kathleen Brooks at CityIndex agrees. “The BOE doesn’t look like it is going to follow the Fed and embark on a rate hiking cycle for many years yet. This hike was a mere removal of the emergency rate taken after the Brexit vote last year, which is why the pound is tanking and why GBP/USD could once again see life below 1.30 and EUR/GBP could rise above the 0.90 mark,” says Ms Brooks.
But Viraj Patel at ING says the reaction of market has been overdone. ” The narrative wrapped around the rate hike is fairly conservative – and can be described as pessimistic. But looking at the Bank’s conditioning assumptions – they retain an element of optimism over the tightness of the labour market manifesting into wage growth,” he says.
Speculation of further rate hikes will continue to prop up sterling, says Mr Patel, which ING forecasts at $1.35 by the end of the year.


Mark Carney answering why has the MPC raised interest rates? Primary goal is price stability, he says. Inflation was 3 per cent in September and is expected to increase. MPC must aim to bring inflation back to target.

With inflation high and slack disappearing, inflation is unlikely to retunr to the target without some increase in interest rates. The economy is growing above potential.

Of course these aren’t normal times. Brexit will redefine our relationship with our largest trading partner. The MPC has repeatedly emphasised that it can’t stop this adjustment. But can support it during this adjustment.

At the time of the referendum MPC set out its framework for doing so and has followed it ever since. The MPC’s current forecasts are broadly consistent with ones made then.


Sheer novelty of the first increase in bank rate for a decade creates some uncertainty about its impact but there are reasons to believe it won’t be particularly big, he says. Only a fifth of people on mortgages have never experienced a rate hike, he says.


Current market yields incorporate two further 25bps increases over the next two years, Mr Carney says. The MPC will react to developments to the extent they effect inflation and activity. Brexit is the biggest one.

The overshoot of inflation throughout the forecast period reflects the impact of the fall in the pound, he says.

Brexit related constraints on investment and labour supply are reinforcing the UK’s poor productivity performance.


The direction of any reassessment for activity and inflation is not automatic, Mr Carney says, but the BoE’s reaction will be consistent with its mandate.


The press conference is now starting


Monetary policy is the only policy providing a boost to the economy, Mark Carney says.

Kamal Ahmed from the BBC how how the bank would explain the increase to someone struggling from lower living standards and why David Ramsden voted against the majority.

Mark Carney points out that unemployment is low and the degree of spare capacity of the economy is very low. The degree of spare capacity will depend on productivity growth which has been very low since the crisis.

We are easing our foot off the accelerator he says. This will have a moderate impact. It leaves monetary policy in a position where it is supportive of jobs and output.

It is the policy that is the boost to the economy, unlike fiscal policy and the uncertainty to do with Brexit, he says. The worst of the real income squeeze is ending and this is partly to stop it coming back.

David Ramsden declines to explain his vote, saying today is about the MPC’s decisions.


Is this the start of a rate rise cycle?

The MPC’s forecast includes two further rate rises over the forecast horizon, Mr Carney says, and they are needed to get inflation back to target. A constant rate of 0.5 per cent would over the next two years deliver inflation of just under 2.5 per cent and the economy would be running above its potential rate of growth, the MPC forecasts. That tradeoff is beyond the tolerance of the MPC. Because of the exceptional circumstances and the headwinds, the BoE has stretched its horizon to return inflation to target, but there are limits to the extent to which it can do that.
If there is resolution of some of the big questions around Brexit, you would expect that to effect how the economy functions, and to change the economic outlook, and therefore you would expect a recalibration of monetary policy, Mr Carney says. But he cautions that the consequences of a resolution on Brexit are not automatic for the path of inflation – it does not necessarily go in just one direction.


Rate rise should be passed on to savers

Hugo Duncan from the Mail asks what impact this will have on savings rate.

Mark Carney replies that they expect this rate increase to be passed on to borrowers and banks passed their previous cut on to depositors. He says it will not affect fixed rate mortage holders for a while and both consumer debt and student debt are unlikely to be affected.

David Ramsden says the average savings rate has been going up this year. We’re already seeing some anticipation.


The productivity slowdown – secular trends, or hit by Brexit?

There has been a long period of lower investment and poor total factor productivity growth which did not matter for a while because there was so much spare capacity in the labour market. We are getting to the point now where there is much less labour supply coming in so these longterm factors are starting to bite, Mr Carney says. That is the biggest part of the story.
It has been reinforced over the past year by some of the Brexit effects, which are twofold: less investment, and process investment. One of the challenges which is just starting to show up is the supply chain effect and the knock-on effects on productivity. The effect of this in the future very much depends on the outcome of the Brexit negotiations.
Almost all growth in the past decade has come from the increasing labour force. Productivity growth has slowed in just about every advanced economy since the financial crisis, but it has been more severe in the UK than elsewhere.
The Bank has not changed its view of the productivity situation since August. The consequence is that unemployment has continued to edge down, a sign that slack in the economy has narrowed.


Global economy is doing better though UK not participating in that as much as it normally would, Mark Carney says

Jason Douglas from the Wall Street Journal asks whether there is a general move to tighten among central bank, ECB and the US Federal Reserve are also hiking.

Mark Carney says the global economy is “firing on eleven out of twelve cylinders”. It’s not a surprise that is having an effect on open economies.

UK is participating in this global upswing but it is not as strong as it normally would be, Carney says. Partly that is because the UK picked up earlier than Europe but also because of “idiosyncratic problems”.


Is wage growth going to pick up?

There are two elements to the real income squeeze: inflation and wage growth. We see inflation going a little higher but then as we get to the turn of the year we see it easing off, Mr Carney says. Our view of wage growth starts with the tightening labour market. Vacancies are at elevated levels, with churn picking up sharply – people are moving between firms and that is a healthy development.
We see that wages for new hires are notably higher than existing wages, and as more people are moving jobs that will fill out. There is quite strong survey evidence that wage growth will pick up next year.
Wages have been weak because productivity has been weak, and we do expect a pick-up in productivity.
The nature of the jobs being created is changing. Lower wage, lower skilled jobs have had a temporary effect on wages.
The pick-up in wage growth will gradually build through 2018. The rates of growth we see at the end of the period are still below historical averages, though, which people will have been used to before the financial crisis.
The MPC still believes in the Phillips Curve. The worst part of the incomes squeeze was in the early part of this year; household incomes are now flat and we think we are past the worst already.


Markets sceptical of a further rate rise

The FT’s deputy markets editor, Richard Blackden, has read the runes of the 2-year gilts, this is what he has to say:

Look no further than the yield on the two-year UK government bond to see what investors and traders make of the decision.

The two-year gilt is the most sensitive to changes in expectations for the BoE’s key rate, and the yield has fallen sharply following the BoE’s increase and forecasts. It has tumbled 8 basis points to 0.39 per cent, taking it comfortably below the central bank’s new base rate of 0.5 per cent.

This tells you bond investors are sceptical that the BoE will ultimately add to today’s widely anticipated move. It also leaves the gilt yield curve in the inverted state it has largely been in since the UK voted for Brexit last year.


Bank of England has set out how it will react to developments in the Brexit negotiations, Mark Carney says

Ben Chu of the Independent points out that the last time the Bank of England and the ECB raised rates they had to cut them very quickly. How should we see it if you have to quickly reverse this increase?

I vote for a “nimble response” says Mark Carney. We as a committee will have to assess the new outlook based on how the Brexit negotiations go, because of the mix of changes in supply, demand and the exchange rate.

I would suggest you think of it through our framework, he says. As we live through these unusual times we have laid out how we think of these trade-offs.

Different people are going to have different views on the probability of an agreement and the impact of an agreement on the economy, he says, but we have set out how we are going to react.

Ben Broadbent points out that before the crisis the average length between interest rate movements was four months and often changed direction within about seven months.


When will you think about ending the reinvestment of gilt proceeds?

The governor is not keen to be drawn on the MPC’s position on quantitative easing. Winding down the reinvestment of maturing gilt holdings would be much further down the track, with the interest rate being the primary tool of monetary policy, Mr Carney says.


Why now?

You do see some build of rising labour costs, he says. Our job is to get inflation back to target over an 18 month horizon

Once the tradeoff between inflation and unemployment goes, and it is going, the justification for an inflation targeting bank to tolerate above target inflation diminishes.

What’s happened since August is the economy has performed slightly better than forecast. You can always wait but you have to have the discipline of the target and if you’re deviating from the target you have to have something you get from deviating.

As we go into Brexit we want people to rely on two things out of the Bank of England. One, we will do what is necessary to get to the target and two, we will make sure the financial sector is stable. Waiting, in the judgement of the MPC, doesn’t deliver it.


Are you comfortable with the current market pricing for future rate hikes?

In reply to this, Mr Carney repeats his answer to an earlier question.
We condition our forecast on the average curve, which had effectively two additional rate hikes over the course of the next three years. We see inflation approaching the target, staying a little above, and the economy running a little above its potential rate of growth. So broad-brush it gets you roughly where you want to be.
What clearly doesn’t get us back to an appropriate management of the trade-off is arguably illustrated by the constant-rate forecast which leaves the economy in excess demand.


Why are your productivity forecasts so low? What would you say to optimistic Brexiteers?

The message to the people of the UK is that the Bank of England is doing its job. We are going to bring inflation back to its target.

The worse of the real income squeeze is easing off and it’s starting to turn and we do not want it coming back and we are working towards making the core of the financial system stable.

That is our contribution to making Brexit a success, whatever deal or transition or end-state is negotiated.

On potential output: we’re running out of road on the labour supply. There’s just less labour to come into the market, it all turns on productivity and the Bank has been persistently disappointed on productivity.

Ben Broadbent: what matters is the relative growth of supply and demand. Demand has been a little bit better than we expected, all that is helped the UK relative to a position where we have relatively sluggish productivity growth.

Even our near term forecasts on productivity have not changed. I do not know what others are forecasting: it may be that some of the differences involve labour supply, we take the population growth estimates and the consequences flow through overall supply growth.


Is the MPC fundamentally split over the future path of monetary policy?

That’s an impossible question to answer, Mr Carney says. Those who felt now is not the time to raise rates started from the same basic framework as the rest of the committee, and the differences in opinion are based on different views on the economic outlook and some of the relationships within the economy.
We are going to be in exceptional circumstances until there is clarification of the future Brexit relationship, what is important is that people understand what we are trying to achieve and the collective limits of the committee’s tolerance.
One of the things we had expected and had not fully seen in the data but were seeing in discussions with companies and in surveys was some rotation away from consumption and into net exports and investment. That is now showing up in the hard data and it is a very positive development because it means the economy is working on multiple engines. That also plays into our decision and reasons why we think the economy has momentum.


What needs to be done to boost the economy’s productive capacity?

Ben Broadbent says that it is not easy to answer. If you look at the last time that happened in the 1860s or 1870s, economic historians are still squabbling over the causes of that period.

Economic historians often say it was a transition period between two technologies, steam and electricity, he says and nothing to do with government policy. Lots of policies might help but there is not some switch we can press to bring it back.

Mark Carney says it will require sustained effort on a variety of fronts and those issues are away from the Bank’s remit.


How is the MPC thinking about exchange rate effects?

Mr Carney says that the core issue which we have been addressing since the start of last year when it became apparent there was going to be a referendum has been the depreciation of sterling. It is a fundamentally driven move by and large Mr Carney says, which puts us in a position where we have been thinking about this trade-off.


How much do you think the benefits of the low interest rate period are now outweighed by the drawbacks?

Mark Carney says the benefits of loose monetary policy clearly outweigh the drawbacks, which can be addressed through other policies.

Inequality has gone down not up, in the UK he says, and more people are in work.

We have a range of other policies and powers to influence financial stability, he says. These tools are better at targeting the side effects.


How bad do things have to be with Brexit for you to take it into your assumptions?

Mr Carney says that what matters, good or bad, is how it affects what businesses and households do. So a substantial proportion of UK businesses are affected by Brexit, about half of those feel it is a material affect, Mr Carney says. Those businesses in general are anticipating ultimately an agreement, they are not managing to the absence of an agreement, they are anticipating some form of transition, Mr Carney says.
What matters to us is what people think is going to happen, Mr Carney says; a little more or less progress will matter to the economy to the extent that people change their attitudes and their spending plans. At some point between now and March 2019 there will probably be some form of transition agreement and at that point it is likely to be a focal point for people to stop and recalibrate and move forward with plans that had been delayed or deferred and we would then take that into account, Mr Carney says.


MPC is not focusing on banking jobs leaving the City

Last question is also about Brexit’s impact on monetary policy and jobs moving from the City abroad. Mark Carney says that is a more long term impact of changing trading arrangements and the MPC does not put much focus on short term changes in commercial bank’s business plans.

And that’s the end of the press conference:


Mark Carney’s press conference has not shifted the markets much. Roger Blitz, our currencies correspondent, reports:

The Carney press conference had little impact on sterling, leaving it 1 per cent lower on the day against the dollar – which is where it reached on the BoE announcement.

Forex analysts predicted a fall in the currency once the rate move had been delivered, following its rise since the start of the week in anticipation of the hike – a typical “buy the rumour, sell the factor” period of market behaviour.

But sterling’s weakness also reflected the dovish tone of the BoE and the market revising downwards its expectations of future rate hikes.

“Conscious that potential UK growth is likely lower as a result of Brexit, persistently above-target inflation is their justification for today’s move,” says Tim Graf at State Street Global Advisors.

“However, once the effects of sterling depreciation pass out of inflation calculations, the still-weak growth and output profile offer little support for a more prolonged tightening cycle. Before today, market pricing for rate hikes over the next two years by the MPC equalled that for the Federal Reserve. The logic behind these expectations is sure to be tested and we believe sterling weakness in response to this dovish hike is more than justified.”


Seven things we learned

1. The Bank of England believes that the UK’s productive potential has got worse

2. The real income squeeze is mostly over and they see some evidence of export growth

3. That means demand is going to grow a little bit faster than supply

4. So the Bank of England is raising rates to help return inflation to target

5. The Bank is happy with markets pricing in two rate increases over the forecast period

6. But the progress of the economy depends a lot on the Brexit negotiations, whether they go better or worse than expected

7. The MPC believes it has set out how it will think about any acceleration or deceleration in the economy


That’s all from us today – thank you for joining us as we watched the UK raise rates for the first time in more than a decade.