Why Did the Bank of England Raise Interest Rates?

The Bank of England raised its benchmark interest rate by 25 basis points, and plans two additional rate hikes by 2020. Here's why the central bank felt an increase was warranted and why the BOE is planning to raise rates extremely slowly.

A full transcript follows the video.

This video was recorded on Nov. 6, 2017.

Michael Douglass: Let's turn to news piece No. 2, rising interest rates. And we're not talking about U.S. interest rates this time. For the first time in a decade, the Bank of England raised interest rates by 0.25%, with plans for two more hikes by 2020.

Matt Frankel: Interest rate hikes are generally a sign that the government is confident in its economy. The U.K. is kind of a special case, because the economy is kind of a mixed bag. Generally, the two main reasons that rates are increased in the first place are, either inflation is getting a little too high, or unemployment is lower than the target range. Both of those are true in England right now. Inflation is at about 3%, and we expect that to go up a little bit with the next reading. Unemployment is as low as it's been in a few decades. But, the flip side of that is, economic growth is slower than it's been in five or six years, since pretty much right after the financial crisis. So, it's kind of a mixed bag. This increase was widely expected. It was a very small increase. England's benchmark interest rate is 50 basis points, 0.5%. This is worth pointing out, this is undoing the emergency rate cut that was done right after Brexit last year. So, don't read into this too much in terms of how well England's economy is doing.

Douglass: Yeah. One of the key things that I think it's also good contacts for this is, the Bank of England, part of their mandate is to target a consumer price index, or CPI, growth of about 2%. As you noted, it hit 3% in September, so it makes sense that they were going to try to tamp that down a little bit. I think it's good news for people who don't like radical change, sort of like how Jerome Powell is good news for people for don't want radical change with U.S. Fed policy. It's good news for people who don't want radical change that the Bank of England raised things by 0.25%. It wasn't a huge change, it's really just trying to tamp things down a little bit to nudge that growth in inflation down to get them closer to their benchmark.

Frankel: Right. Like you said, they're only expecting two more rate hikes within the next three years, which is probably about third of the pace that we're expected to raise interest rates.

Douglass: Right.

Frankel: I would take that more as a sign of uncertainty in the economy than anything else. The numbers themselves look pretty good right now, but Brexit is still in the background, and growth is a little higher than it should be given such high inflation and good unemployment. So, it's more of a sign of caution than anything else.

Douglass: Yeah, there's a lot of uncertainty for our friends across the pond right now.