The Bank of England has increased interest rates for the first time in a decade, raising its benchmark by a quarter of a percentage point to 0.5 per cent. BoE governor Mark Carney explains the decision.
The MPC's primary objective is price stability, defined by the government as a 2% CPI inflation target. CPI inflation was 3% in September. And it's expected to have risen a little further in October. But it isn't so much where inflation is now, but where it's going that concerns us. The MPC must set policy to achieve a sustainable return of inflation to target. That is, we must aim to bring inflation back to target and to keep it there once the effects of temporary factors-- currently, predominantly those caused by the referendum-related fall in sterling.
With inflation high, slack disappearing, and the economy growing at rates above its speed limit, inflation is unlikely to return to the 2% target without some increase in interest rates. Of course, these aren't normal times. Brexit will redefine the UK's relationship with our largest trade and investment partner. And it will have consequences for the movement of goods, services, people, and capital, as well as the real incomes of UK households.
The MPC has repeatedly emphasised that monetary policy cannot prevent either the necessary real adjustment to new trading arrangements or the weaker real income growth likely to accompany that adjustment. We can, however, support the economy during the adjustment process. In such exceptional circumstances, the MPC is required to balance any trade-off between the speed at which we return inflation sustainably to target with the support that monetary policy provides to jobs and activity.
At the time of the referendum, the MPC set out our framework for doing so. And we've followed it consistently ever since. The MPC's assessment of the outlook for inflation and activity, published today, is broadly similar to our projections three months ago. In our forecast, conditioned on the gently rising path of Bank Rate implied by current market yields, GDP grows modestly over the next few years at a rate just above its reduced rate of potential.
With unemployment at a 42-year low, inflation running above target, and growth just above its new lower speed limit, the time has come to ease our foot a little off the accelerator. That will help bring inflation back towards its 2% target while still supporting jobs and growth.