BoE says it would accelerate rate rises after orderly Brexit

The Bank of England signalled on Thursday that it would need to step up the pace of interest rate rises in the years ahead if Theresa May was able to negotiate a smooth Brexit deal.

Announcing the verdict of the bank’s latest Monetary Policy Committee meeting, the BoE said rate rises would still be “gradual”, but it indicated that it would need to raise interest rates to 1.5 per cent over the next three years to keep inflation under control.

Three months ago, it suggested only one quarter-point increase was necessary over the same period to stop the economy from overheating.

The faster pace of monetary policy tightening was needed because the economy was no longer depressed and any excess spending and rapid growth would now push inflation persistently above the central bank’s 2 per cent target, according to the MPC.

Voting unanimously to keep interest rates unchanged at 0.75 per cent in its November meeting, the MPC’s forecasts showed inflation under control only if rates were to settle at close to 1.5 per cent by mid 2021.

That is more hawkish than financial markets currently expect, although interest rate futures prices have been volatile recently, gyrating on the twists and turns of the Brexit negotiations.

The pound reached a fresh high for the day as investors measured the tone of policymakers’ thinking, especially on the outlook for UK interest rates. Sterling rose as high as $1.2928, its strongest level for six sessions.

The BoE’s new central forecast was based on an assumption of a smooth Brexit with a transition deal starting next March and without any immediate disruption when Britain leaves the EU.

Repeating his warning that if there was a disorderly Brexit, the BoE’s interest rate response “will not be automatic and could be in either direction,” Mark Carney, governor, sought to send a message that he would not necessarily be able to bail out politicians if they could not strike a deal with Brussels.