With the global economy growing strongly, the Bank of England has turned more confident about Britain's near-term prospects and indicated it could raise interest rates in coming months — even in the face of uncertainties over the country's exit from the European Union.
Though it kept its main interest rate on hold at 0.5 percent on Thursday, as expected, the bank indicated that it could make another three quarter-point hikes over the next three years. The next could come as soon as May, when the bank will publish its next set of quarterly economic projections.
The bank had in November raised its main rate by a quarter point, its first hike in a decade, to keep a lid on inflation. Prices had been rising sharply due to the pound's sharp fall after the June 2016 vote for Brexit. The pound's drop simultaneously pushed up import costs, notably of food and energy, and weighed on economic growth by reducing living standards as price rises started to outpace wage growth.
Though the outlook for the British economy is conditional on the outcome of the Brexit discussions, particularly what the future trade relations will be, the central bank's rate-setting Monetary Policy Committee said that "monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent" than it anticipated in November.
That view is based on the assumption that the British economy grows in line with the bank's forecasts, published Thursday in its so-called Inflation Report. It includes an assumption that Britain will be able to get "a smooth adjustment" to a new trading relationship with the EU.
That is a major assumption, not least because the minority Conservative government appears deeply split on Brexit. While some lawmakers in Prime Minister Theresa May's party want close ties with the remaining 27 EU nations and a period of transition, others want a more fundamental break that would see Britain diverge more profoundly on regulatory and trade matters. Meanwhile, the views of the opposition Labour Party, which may be a determining factor should there be a parliamentary vote on any final Brexit deal, are also considered opaque.
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