The Bank of England (BoE) raised interest rates to take them above 0.5 percent for the first time since 2009, a move which is intended to see the bank rate gradually move upwards, but which will not take it to the levels seen before the financial crisis.

Governor of the BoE Mark Carney explained what had changed in the economy in the two years since the Brexit referendum that gave the central bank a justification for it to put the bank rate on a path back towards more conventional levels, rather than the historically low level seen since the onset of the financial crisis in autumn 2007.

Carney said that when the Brexit referendum put Britain on the road to leave the European Union (EU) in June 2016 business confidence fell sharply to levels last seen in the wake of the financial crisis.

At the same time inflation was expected to overshoot its target, entirely because of a sharp drop in sterling, which itself reflected the view of financial markets that Brexit would bring a large negative real shock to UK relative incomes.

Back then, Carney said, the Bank decided to cut the rate, by 25 basis points, as an emergency measure to support jobs and activity.

Carney said the strategy had worked and employment was now at a record high, there was very limited spare capacity in the economy, real wages were finally growing after being hammered by inflation and external price pressures were declining as the negative effects of sterling's devaluation faded.

Against this background, said Carney, and with domestically generated inflation building and the prospect of excess demand emerging, a modest tightening of monetary policy was the first step in one of several rate rises he anticipated over the coming two years.

Amit Kara, head of UK Macroeconomic research at the National Institute for Economic and Social Research (NIESR) said that Carney and the Bank were right to raise the rate now, and right to consider a gradual rise in the rate in the coming years.

"The broad agenda is to start to normalize interest rates in a very gradual manner. In terms of their communication it is one or two rate increases each year," Kara told Xinhua in an exclusive interview.

"There was a little bit of debate in the markets about whether this rate increase was required, but the Bank has made it quite clear that spare capacity is running out and a small increase is necessary."

Carney and the rate-setting Monetary Policy Committee (MPC) at the Bank voted unanimously to raise the rate, a move which surprised observers and which moved the committee on from its previous meeting in June where the rate rise hawks were outnumbered 3-6.

They have acted now because their window to act may be limited by the volatile political background.

"This rate increase comes against a background of an enormous amount of uncertainty," said Kara.

"This is primarily related to Brexit. In spite of this uncertainty the economy is doing OK -- growth is around 0.4 to 0.5 percent quarter on quarter which for most people... is close to its speed limit."

So the time is ripe for a rise.

BREXIT QUESTION MARK FOR MONETARY POLICY

But could the Governor and the Bank be forced to backtrack in a few months time if things turn sour?

Right now, conditions seem pretty good.

"Employment is at a record high and unemployment at a record low. At the same time we don't see any strong signs of inflationary pressure, either through CPI inflation or indeed into wage inflation," said Kara.

Carney said on Thursday that the Bank's forecast was conditioned on the assumption of a relatively smooth transition to an average of a range of outcomes.

"This is not a prediction but rather a simplifying assumption which broadly reflects how UK businesses and households are behaving," he said.

Carney warned: "The Committee recognises that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal.

"Negotiations are now entering a critical period, with the UK and EU both seeking an agreement by the end of the year -- although the range of potential outcomes is wide, what matters for monetary policy is how people react to developments - and how these reactions affect the balance of supply, demand and the exchange rate."

Kara said: "Brexit is by far the most important risk facing the British economy... it is fair to say most people believe that the entire spectrum of outcomes ranging from another referendum right up to a no-deal Hard Brexit WTO Rules remains alive.

"We are really no closer to an outcome, or at least any information about an outcome than we were two years ago."

The nature of Brexit -- a soft one which will see Britain and the EU continue trading almost seamlessly by agreement or a hard one where Britain has more control but where both it and the EU will set tariffs and border controls -- is crucial.

"It is first of all not just the outcome that matters but it is also the response of the economy -- households, businesses and the financial markets to that outcome which is unknown," said Kara and that response could be negative in negative circumstances.

"The Bank should have been a bit more explicit about the response to these various outcomes," he said.

Carney had said that most Brexit scenarios would see the bank rate continue on an upward path, but he also warned that some Brexit outcomes might mean a rate cut.

Kara said: "The Bank should have been very clear that if circumstances turn out to be materially different from the Bank's forecast... then the MPC should stand ready to reverse course, to change interest rates, to cut aggressively if required, in response to those circumstances.

"I think the message on that front could have been a bit clearer. But even so I think a rate increase was appropriate."