Bloomberg News - The Bank of England’s Rate Rise Could Spook Britain’s Economy

By Fergal O’Brien and Brian Swint

The Bank of England, led by Governor Mark Carney, raised interest rates for the first time in more than 10 years on Thursday.

While inflation is running at the fastest pace in five years and unemployment is at a 42-year low, some economists and businesses have warned that a rate increase now would be a mistake. Growth has weakened this year, wage growth isn’t yet picking up and the chaotic process of leaving the European Union is casting a shadow over the outlook. The British Chambers of Commerce urged the BOE to wait.

As the U.K. crawls out of an era of record-low rates, here’s what’s happening in the economy.

What Does It Mean for Inflation?

Fueled by the weaker pound, inflation is weighing heavily on policy makers’ thinking. While officials say the currency-led pickup should prove temporary, they’re increasingly concerned that Brexit has left the economy prone to more persistent price pressures. Inflation hit a five-and-a-half year high of 3 percent in September. The BOE kept its inflation forecasts broadly unchanged and sees it staying above the 2 percent target for the next three years, even after the rate increase.

What Does It Mean for Sterling?

The pound climbed to its highest level since the Brexit referendum in the days after the BOE’s September signal that it was likely to raise rates in the coming months. A November move was almost entirely priced in before the decision, but hints that the next rate increase won't come any time soon sent the currency down. Sterling dropped about 1 percent after the announcement.

What Does It Mean for Growth?

While the economy has grown for 19 straight quarters, it’s lost momentum and may be heading for its worst annual performance since 2012. But Carney is worried that potential output is also lower (partly because of Brexit) meaning a greater risk of overheating. Expansion this year may slow to 1.5 percent, which would be weaker than both the U.S. and euro area. The BOE kept its growth forecasts broadly unchanged.

What Does It Mean for Jobs?

Unemployment is at the lowest level in more than four decades and below the 4.5 percent rate that the BOE sees as fanning inflationary pressures. For some policy makers, that means spare capacity is running out and it’s time to get ahead of a pickup in wage growth and start tightening before it becomes too late. The BOE predicted that unemployment may stay lower than it previously thought and now sees the rate holding at 4.2 percent through 2019.