British interest rates will rise above 0.5 percent for the first time in 11 years, the central bank the Bank of England (BoE) announced Thursday lunchtime.
The rise of 25 basis points from 0.5 percent to 0.75 percent is only the second increase in the bank rate since July 2007.
TIGHTENING MONETARY SIGNALLED
All nine members of the BoE's rate-setting Monetary Policy Committee (MPC) unanimously backed the rise.
The BoE said in a statement that the committee "continues to judge that the UK economy currently has a very limited degree of slack" and labor demand growth remains "robust".
This reflects tightening in the labor market, with indicators of pay growth strengthening and pay growth projected to rise further. That combined with subdued productivity growth, is contributing to rising domestic cost pressures, the bank said.
Decision makers noted Consumer Price Index (CPI) inflation is currently 2.4 percent (the latest figures in June), above the BoE's target of 2 percent.
The bank forecast that the rate would rise slightly in the coming months driven up by higher world oil prices before falling back to the 2 percent target area in two years time.
The bank also judged that the economy is growing this year at about 1.75 percent, above its capacity, and slightly above the supply growth of 1.5 percent, leading to a build-up of demand.
The number of workers in the economy is at a record high, while the jobless rate at 4.2 percent is at a low not seen since the 1970s.
The MPC said it was raising rates now because it expected there would be excess demand in the economy by late 2019 which would increase and would "feed through into higher growth in domestic costs".
The BoE highlighted the dangers of the Brexit process to the economic outlook, saying that households, businesses and financial markets could be "influenced significantly by the process of EU withdrawal".
The BoE clearly signalled that it would continue to tighten monetary policy (raising rates) between now and the middle of 2020, "and that any future increases in the bank rate would be likely to be at gradual pace and to a limited extent."
The last meeting of the MPC in June saw members vote 6-3 to maintain the 0.5 percent rate.
This rate had been reached in November last year when the BoE reversed its emergency 0.25 percent rate cut implemented in the wake of the Brexit referendum in June 2016.
INFLATION AND GDP OUTLOOK
The bank also unveiled its quarterly inflation report, with forecasts of GDP growth and inflation expectations.
GDP growth between now and summer 2020 was forecast at 1.75 percent over each four-quarter period, with net trade and investment supporting growth, in part reflecting continued robust global growth.
CPI inflation had fallen back from a high of 2.8 percent, reached as the effects of the sudden Brexit-driven sterling depreciation took hold from the summer of 2016 onwards.
Modest domestic inflationary pressures will not be severe enough to deflect the downward path of CPI inflation as those sterling-driven effects fade.
The result will be inflation falling to 2.3 percent by the end of this year, the bank said.
A continued gradual decline after that will see inflation at 2.2 percent by the end of 2019 and 2.0 percent by the end of 2020.
TRUMP TRADE WAR WARNING
The bank warned that the trade tariff war initiated by U.S. President Donald Trump's represented a threat to the global economy, and especially to emerging market economies.
The BoE noted that there were "more negative effects on global growth from the implementation of protectionist measures".
The effect was that some indicators of world trade, including the export order components of manufacturing PMIs, and advanced economies' capital goods orders, "had weakened significantly during the first half of the year."
The bank added: "Uncertainty around tariffs and the resulting impact on trade has led to falls in some equity indices, especially in emerging markets."
