The Bank of England Thursday raised U.K. interest rates for the first time since 2007, in an effort to support the pound and head off inflationary pressures caused by a slump since the U.K. voted to leave the EU 16 months ago.
The U.K. central bank raised its key refinancing rate by 0.25 percentage point to 0.50%, its nine-member Monetary Policy Council voting 7-2 in favor of the move. That effectively reverses the emergency action it had taken in the wake of the Brexit vote in June 2016, when it had felt compelled to prove its determination to support the economy.
“What we’re doing is easing our foot off the accelerator,” Governor Mark Carney said in a press conference following the decision. He added that the step “leaves monetary policy in a position that is still highly supportive for jobs and economic activity.”
The 2016 rate cut, combined with a broader loss of confidence in the U.K. economy due to the Brexit vote, led the pound to slide against other major currencies. It lost over 11% of its trade-weighted value in the four months that followed, forcing up the price of imports. Further rises in the cost of basic inputs such as energy have since driven consumer inflation up, even though the country has the same weak wage dynamics as those seen elsewhere in the developed world.
The BoE is required by law to keep the inflation rate at or below 2%. However, it hit 3% in September and the Bank expects it to edge higher in October before falling back towards target over the next year or so.