The Bank of England has raised interest rates above the emergency level introduced after the financial crisis despite mounting fears about the economic impact of Britain crashing out of the EU without a deal.
Citing concern that the lowest unemployment rate since the mid-1970s risked re-igniting wage pressure, the Bank of England 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.
Mark Carney, the Bank’s governor, told businesses and households there would be further increases in borrowing costs if economy continued to recover from a softer patch earlier this year, but he also signaled willingness to reverse the quarter-point increase in the event of a disorderly Brexit.
“If there is a major shift [in the Brexit talks]… then that could have consequences for monetary policy,” he said. “We can adjust when necessary.”
The Bank’s decision, only the third change in interest rates in the last decade, comes as fears mount over Brexit, with Theresa May facing parliamentary divisions over her plan.
Raising rates will mean higher borrowing costs on mortgages and loans for consumers and businesses as they adapt to Britain leaving the EU. An extra 0.25% will add £12 a month to a £100,000 repayment mortgage and £25 on a £200,000 loan. Nearly 70% of homebuyers, however, have fixed-rate mortgages so will be unaffected.
In giving its rate decision, the Monetary Policy Committee 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.
Outlining its decision, the Bank said interest rates were unlikely to return to the levels seen before the financial crisis, when they were more commonly set above 5%. Any future increases in the cost of borrowing are likely to come at a “gradual pace and to a limited extent,” it said.
Interestingly, at the time of writing there has been no negative reaction to investment markets. But as we all know, this could change at any time.