The Bank of England lifted its key benchmark rate by a quarter point to the highest since 2009 as policymakers were more concerned about above target inflation than Brexit uncertainties.
The Monetary Policy Committee, headed by Governor Mark Carney, unanimously decided to lift the benchmark rate by 25 basis points to 0.75 percent, the bank said in a statement on Thursday.
Economists did forecast a rate hike, but a unanimous vote came as a surprise.
The bank had earlier hiked its key rate by 25 basis points in November 2017, which was the first increase in a decade.
The MPC also voted 9-0 to maintain the quantitative easing at GBP 435 billion.
Policymakers said the dip in the UK output in the first quarter had been temporary, with momentum recovering in the second quarter. The labor market had continued to tighten and unit labor cost growth had firmed.
“Given these developments, a 0.25 percentage point increase in Bank Rate was warranted at this meeting to return inflation sustainably to the target,” the BoE said.
If the economy expands as projected, an ongoing tightening of monetary policy over the forecast period would be appropriate, policymakers said. They reiterated that any future increases in Bank Rate will be gradual and limited.
At the press conference, Carney said policy needs to walk, not run to standstill.
Interest rates will rise by more than markets currently expect over the next few years, Ruth Gregory at Capital Economics said. Inflation forecast suggested that markets might well be slightly underestimating the degree of monetary tightening required, the economist added.
The updated projections for inflation and activity set out in the August Inflation Report were broadly similar to the projections in May.
In the MPC’s central forecast, GDP is expected to grow by around 1.75 percent per year on average over the forecast period.
The economy is seen to recover in the second quarter after temporary factors disrupted growth in the three months to March. GDP is forecast to grow 0.4 percent in the second quarter on consumption growth.
Business investment and net trade should continue to support GDP growth, though remain sensitive to the global outlook and the effects of Brexit, the bank noted.
CPI inflation is forecast to remain slightly above 2 percent through most of the forecast period, reaching the target in the third year. Inflation is seen at 2.2 percent by the third quarter of 2019, and 2.1 percent by 2020.