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Bank of England Raises Interest Rates to Highest Level Since 2009

LONDON—The Bank of England raised its benchmark interest rate to its highest level in almost a decade, highlighting how quickening inflation remains a bigger worry for central banks than a brewing global trade war.

The move marks the latest small step by a major central bank to dial back the monetary stimulus that has been supporting the global economy since the financial crisis tipped the world into recession in 2009. BOE officials Thursday voted unanimously to raise the central bank’s policy rate to 0.75% from 0.5%, the second rate increase in less than a year.

The change in policy also underscores that—for now—the widening trade dispute between the U.S. and its biggest trading partners isn’t causing the kind of economic disruption that could throw the global economy out of kilter.

The U.S. Federal Reserve held short-term interest rates in the U.S. steady Wednesday but signaled that it remains on track to raise them again next month. Officials didn’t even mention trade policy in their regular policy statement.

Central banks in India and the Czech Republic nudged up their main interest rates this week, while the European Central Bank is poised to phase out its bond-buying program later this year.

Driving these decisions are signs that inflationary pressures that have mostly lain dormant for years are strengthening as the global economy enjoys a robust, if uneven, spell of growth, led by a booming U.S. Figures released Thursday by the Organization for Economic Cooperation and Development showed global inflation hit a four-year high in June.

While the threat of a full-blown trade war is clouding the outlook for the global economy, there are few signs that the skirmishes so far are significantly weighing on growth.

“We can understand how it could get worse,” BOE Governor Mark Carney said at a news conference Thursday, referring to the impact of escalating tit-for-tat protectionism.

But he added central bank officials aren’t yet picking up any major deterioration in the economic data. Mr. Carney said policy makers are particularly watchful for any signs that trade tensions are sapping business confidence and hitting investment, echoing remarks last month by his counterpart at the ECB, Mario Draghi.

“Clearly, a trade war where you have rounds of retaliation and rounds of responses would create an entirely different climate,” Mr. Draghi said.

The U.S. on Wednesday threatened to double proposed tariffs on Chinese imports, the latest escalation in a dispute between Washington and Beijing over trade policy. President Trump, unhappy at trade practices he perceives as unfair on the U.S., has also taken aim at imports from allies including Canada, Mexico and the European Union. Those affected by the U.S. tariffs have retaliated with levies of their own on American imports.

Mr. Carney said the BOE reckons the new tariffs will lead to slightly weaker global growth in 2018 than it predicted in May but it kept its forecast for 2019 unchanged. Officials expect global growth this year of 2.75% and 2.5% in 2019.

Central banks including the Fed and the BOE have stressed they plan to raise borrowing costs only slowly and gently with the aim of ensuring higher interest rates don’t derail the global expansion.

The BOE predicted steady if unspectacular growth for the U.K. in the coming years and signaled that it anticipates that it can keep a lid on inflation with only one or two more quarter-point rate increases through mid-2021.

Another uncertainty dogging the U.K. economy is Britain’s looming withdrawal from the EU. The U.K. is scheduled to leave the bloc in March 2019 but key aspects of its future economic ties to the EU remain unresolved.

BOE officials fear that uncertainty is restraining business investment and productivity growth, limiting the speed at which the British economy can expand without spurring faster growth in prices.

Thursday’s increase takes the benchmark rate to its highest level since 2009. The pound fell despite the rate rise, reflecting Brexit-related concerns among investors.

BOE officials have warned that a messy divorce, in which the U.K. crashes out of the EU without a deal, could cause severe damage to the economy. Sterling was down 0.7% at $1.3017 late Thursday, its lowest level in nearly two weeks.

Write to Jason Douglas at [email protected] and Paul Hannon at [email protected]

Source : WSJ

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