It is the second rate hike by the U.K. central bank since August 2016, when the rate was slashed in the wake of the decision to withdraw from the European Union (EU), known as Brexit.
The first rate hike after Brexit and the Global Financial Crises took place in November 2017.
All 9 members of the BOE's monetary policy committee (MPC) voted to raise the rate and also maintain the stock of UK government and corporate bonds that total 445 billion pounds. At the last meeting in June only 3 members had voted to raise the rate.
Despite the guidance that monetary policy will continue to be tightened, the uncertainty over Britain's future outside the EU after March 2019 weighs heavily on economic prospects.
"The MPC continues to recognize that the economic outlook could be influenced significantly by the response of households, businesses and financial markets related to the process of EU withdrawal," the BOE said.
On top of this uncertainty, the MPC members found that the pace of global growth was a little softer and less synchronized than previously expected, with "tentative signs that actual and protectionist policies were starting to have an adverse impact."
The BOE had been set to raise its rate in May but held off as it became clear the UK economy slowed sharply in the first quarter, a slowdown also seen in the euro area and China.
But the BOE said economic data confirm "the dip in output in the first quarter was temporary, with momentum recovering in the second quarter" as the UK labour market continues to tighten amid a very limited degree of slack that results in excess demand by late 2019, feeding into higher domestic costs and thus inflation.
In an update to its economic projections, the BOE raised its forecast for inflation and economic growth while the outlook for the Bank Rate, which is based on forward market interest rates, was lowered slightly but still points to the next rate hike in the second half of 2019.
The BOE expects inflation to average 2.5 percent in the fourth quarter of this year, up from May's forecast of 2.4 percent, and 2.2 percent in the fourth quarter of 2019, up from 2.1 percent. By the final quarter of 2020, inflation is seen at 2.1 percent, up from 2.0 percent and then 2.0 percent in 2021.
The UK economy is seen growing an annual 1.5 percent in the fourth quarter, up from 1.4 percent seen in May, then 1.8 percent in the 2019 fourth quarter, up from 1.7 percent, and then an unchanged 1.7 percent in the final quarters of 2020 and 2021.
The path of the Bank Rate, as implied by forward rates in financial markets, rises to 0.9 percent by the third quarter and fourth quarters of 2019 from 0.7 percent in the fourth quarter of this year, signaling that markets don't expect further hikes this year and only one more hike next year.
The UK economy grew by only 0.2 percent in the first quarter of this year for annual growth of 1.2 percent, down from 1.3 percent in the previous quarter. But the BOE expects growth of a quarterly 0.4 percent in the second quarter, supported to solid global growth.
Inflation was steady at 2.4 percent in June from April and May, reflecting past depreciation of the pound and higher energy prices.
Despite the rate rise, the pound continued its slide since mid-April and was trading at just over 1.30 to the U.S. dollar, down 3.8 percent this year and down 10 percent since 1.43 on April 17.
The Bank of England released the following statement:
"The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 1 August 2018, the MPC voted unanimously to increase Bank Rate by 0.25 percentage points, to 0.75%.
The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.
Since the May Inflation Report, the near-term outlook has evolved broadly in line with the MPC’s expectations. Recent data appear to confirm that the dip in output in the first quarter was temporary, with momentum recovering in the second quarter. The labour market has continued to tighten and unit labour cost growth has firmed.
The MPC’s updated projections for inflation and activity are set out in the August Inflation Report and are broadly similar to its projections in May.
In the MPC’s central forecast, conditioned on the gently rising path of Bank Rate implied by current market yields, GDP is expected to grow by around 1¾% per year on average over the forecast period. Global demand grows above its estimated potential rate and financial conditions remain accommodative, although both are somewhat less supportive of UK activity over the forecast period. Net trade and business investment continue to support UK activity, while consumption grows in line with the subdued pace of real incomes.
Although modest by historical standards, the projected pace of GDP growth over the forecast is slightly faster than the diminished rate of supply growth, which averages around 1½% per year. The MPC continues to judge that the UK economy currently has a very limited degree of slack. Unemployment is low and is projected to fall a little further. In the MPC’s central projection, therefore, a small margin of excess demand emerges by late 2019 and builds thereafter, feeding through into higher growth in domestic costs than has been seen over recent years.
CPI inflation was 2.4% in June, pushed above the 2% target by external cost pressures resulting from the effects of sterling’s past depreciation and higher energy prices. The contribution of external pressures is projected to ease over the forecast period while the contribution of domestic cost pressures is expected to rise. Taking these influences together, and conditioned on the gently rising path of Bank Rate implied by current market yields, CPI inflation remains slightly above 2% through most of the forecast period, reaching the target in the third year.
The MPC continues to recognise that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal.
The Committee judges that an increase in Bank Rate of 0.25 percentage points is warranted at this meeting.
The Committee also judges that, were the economy to continue to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon. Any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent."
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