BoE's Carney: Two Extra Rate Rises Needed Over Three Years To Stop Economy 'running Too Hot'

Following the announcement of the Bank's decision to increase rates from 0.25% to 0.5% today - the first rise in a decade - Carney reiterated the BoE is "easing our foot off the accelerator", after almost of decade of ultra-low interest rates.

He said the UK needs to see two further rate increases over the next three years in order to return inflation to its target of 2% and prevent the economy from running "too hot".

Carney added that the "sheer novelty of a rate rise creates uncertainty over the impact but we are well positioned for a rate rise".

A total of seven members of the committee voted for an interest rate rise today, while just two members voted for rates to remain at 0.25%. At its last meeting in September, only Ian McCafferty and Michael Saunders had voted for a rise.

A statement from the BoE said: "The MPC now judges it appropriate to tighten modestly the stance of monetary policy in order to return inflation sustainably to target."

"All members agree that any future increases in Bank Rate will be at a gradual pace and to a limited extent," it added.

In particular, the MPC noted challenges to the UK economy, including the ongoing Brexit negotiations.

Carney said the Brexit vote had exacerbated the UK's productivity problems,and deterred businesses from making new investments. This is affecting the amount of spare capacity in the UK economy, and could affect the future rate path.

"If there is a resolution over Brexit or greater clarity over the deal then we will have to assess that new outlook. If this results in an acceleration in the interest rate path then that is a nimble response; if we feel it needs more support then that is also a nimble response," he said.

He also pointed to the UK lagging behind a global economy that is showing a lot of strength; if the global economy had a 12-cylinder engine it would be firing on 11 of them.

However, in its Quarterly Inflation Report, released with the announcement on rates, the Bank slightly raised its UK growth forecast for this year to 1.5% from 1.3% and also edged up its growth forecast for next year.

Markets had been an anticipating a more 'hawkish' hike, prompting sterling to drop following the announcement by 1.1% to $1.31, while gilt yields were at times up to 10bps lower. The FTSE 100 climbed 0.74% to 7,544 points, before starting to fall back.

Today's increase is a reversal of the rate cut Bank of England governor Mark Carney implemented last year in the wake of the Brexit vote, which rocked markets and caused sterling to plummet.

This is the first time rates have been raised since July 2007, when they were increased by 0.25% from 5.5% to 5.75%.

However, as the global financial crisis began to unfold the BoE, then led by Mervyn King, rates began moving downwards and on 8 October 2008 central banks around the world cut rates in a coordinated move as the crisis peaked.

Since March 2009, rates have been at or under 0.5%.