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Economy

Bank of England raises rates for first time in 10 years

The Bank of England raised interest rates for the first time in a decade, to 0.5%, in a move that was expected by money managers.

The bank's Monetary Policy Committee, which sets policy to meet a 2% inflation target in a way that helps to sustain growth and employment, voted by a 7-2 majority to increase the bank rate by 0.25 percentage points. A meeting of the MPC on Wednesday also saw the committee vote unanimously to maintain its asset purchase program.

A statement outlining the MPC's decisions said the committee's outlook for inflation and activity in its November inflation report is "broadly similar to its projections in August." The MPC still expects inflation to peak above 3% in October and then fall back over the next year, "and, conditioned on the gently rising path of bank rate implied by current market yields, to approach the 2% target by the end of the forecast period."

The projections are conditioned on reaching a trading relationship with the European Union following the U.K.'s exit from the EU.

"The decision to leave the European Union is having a noticeable impact on the economic outlook," said the statement. Brexit-related uncertainty is weighing on domestic activity, "which has slowed even as global growth has risen significantly. And Brexit-related constraints on investment and labor supply appear to be reinforcing the marked slowdown that has been increasingly evident in recent years in the rate at which the economy can grow without generating inflationary pressures."

Any future increases in interest rates "would be expected to be at a gradual pace and to a limited extent," added the statement.

In reaction comments, money managers said the move was expected. "In line with market expectations, the MPC made good on its recent hawkish signaling by voting 7-2 to raise the bank rate to 0.5% for the first time in over a decade," said Alan Wilson, active fixed-income portfolio manager at State Street Global Advisors, Europe, Middle East and Africa. "Despite today's policy tightening, the accompanying BoE messaging suggests today's hike was a one-and-done move; the MPC seem to be cognizant of the upcoming headwinds facing the U.K. over the coming year."

Iain Lindsay, co-head of global portfolio management for fixed income at Goldman Sachs Asset Management, said in a comment that while the move was expected, the firm views external rather than domestic drivers as having supported the U.K. economy since the Brexit vote. "As these drivers begin to fade, we think weaker business investment and slower migration flows could weigh on both the growth and inflation outlook, providing we do not experience renewed weakness in the British pound. And although U.K. inflation remains above the BoE's 2% target, we think market pricing overstates the pace of monetary tightening."