Bank of England raises interest rates for the first time in a decade and signals more increases ahead

The Bank of England raised interest rates for the first time in more than 10 years on Thursday and said it expected only “very gradual” further increases over the next three years.

The Boe said its nine rate-setters voted 7-2 to increase its benchmark Bank Rate to 0.50 per cent from 0.25 per cent, reversing the emergency cut made in August 2016, soon after the shock decision by British voters to leave the European Union.

It was the first time that the Boe increased borrowing costs since 2007, before the eruption of the global financial crisis, which tipped Britain into its deepest recession in decades.

However, sterling fell around a cent against the US dollar and government bond yields dropped by 5 basis points as markets homed in on the Boe’s cautious approach to future rate rises. The Boe did not repeat previous language about markets underestimating the extent of future rises.

Boe Governor Mark Carney said the sheer novelty of a first rate hike created some uncertainty about its impact on the economy, but there was no reason to expect it to be larger than normal. Domestic inflation pressures were likely to build, he said.

“It isn’t so much where inflation is now but where it is going that concerns us,” Carney said in a speech following the decision. But he added that even after the rate increase, monetary policy will provide significant support to jobs and activity.