What's going on?
On Thursday, the Bank of England (BoE) hiked interest rates in the UK for the first time in a decade! While rising interest rates are usually a sign of a growing economy, not everything seems so swell…
What does this mean?
Prices have been rising more quickly in the UK than the central bank would like. In other words, inflation has been too high. By raising its target interest rate, the BoE makes it a little more attractive for foreigners to invest in UK government bonds because it pays them a bit more interest. That tends to lead to international investors buying pounds (why? click here), thus pushing up the pound’s value. In turn, goods that are imported into Britain cost less in pound terms – which puts a damper on inflation. So Thursday’s move was essentially a way of trying to keep inflation in check.
Why should I care?
For markets: Counter-intuitively, the pound fell following the news…
Thursday’s move by the BoE was widely expected by investors, and the pound had already appreciated in recent months as BoE officials hinted heavily that they would take action at this meeting. The new news on Thursday was that the BoE suggested it would only raise its target interest rate very gradually (and probably not again for at least 3-6 months) – and so the pound actually fell by almost 1% versus other major currencies on Thursday.
The bigger picture: Investment is suffering in the UK as Brexit uncertainty weighs on the economy.
According to the BoE, the lack of clarity on Brexit is discouraging business investment (in innovative technology, for example) which, in turn, is hurting the long-term efficiency of workers in the economy (also known as productivity). This is likely why it doesn’t want to increase interest rates again soon – it would rather keep borrowing costs low, so that people and companies are encouraged to spend money. In the meantime, the BoE has its fingers crossed that inflation doesn’t increase much further.