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Bank of England keeps rates steady, but two policymakers unexpectedly back hike

24 March, 2018, 14:16 | Author: Melinda Barton
  • EUR  USD price chart

Bank of England policy makers look increasingly likely to raise interest rates at their May meeting after data suggested faster domestically generated inflation is on the way.

Gilt futures initially fell after the BoE announcement but were stronger at 1320 GMT, up almost 80 ticks on the day, roughly in line with German bund futures.

"The odds of a more hawkish tilt at today's Bank of England policy meeting have risen materially following what has been a relatively constructive week of Brexit developments and United Kingdom data", said Viraj Patel, a strategist at ING.

Though they were in the minority, the minutes indicated that a majority in the committee is ready to back another interest rate hike soon.

At the same time the US Dollar remains under pressure this morning in the wake of the Federal Reserve own rate decision on Wednesday.

By contrast, long-dated gilt prices have been supported in recent weeks due to reduced issuance plans, as Britain's net public borrowing needs have fallen to their lowest since 2002.

The bank voted to leave monetary policy frozen as was widely expected, but two policymakers voted to hike interest rates. "Overall, last-minute information released before today's MPC meeting, such as the news that wage growth has "accelerated" to 2.6%, strengthens the case for a rate rise in May", Urwin said.

Ian McCafferty and Michael Saunders argued that a "modest tightening. could mitigate the risks from a more sustained period of above-target inflation that might necessitate a more abrupt change in policy and hence a greater adjustment in growth and employment".

Earlier this month, Bank of England Governor Mark Carney said crypto-currencies such as bitcoin had failed as a form of money, but he said the technology could improve the financial system in future.

- Economists expect three rate rises in 2018 and two in 2019.

On Thursday, the BoE said economic developments since then broadly backed up this view. The BoE raised the base rate for the first time in a decade back in November, taking it up by 25 basis points to 0.50%, citing inflation of 3% and the need to return the consumer price index to the 2% target.

Economic optimism has also gained a boost after Brexit negotiators reached a breakthrough this week on securing a transition deal once the United Kingdom quits the European Union next year.

Thursday followed with Britain's February retail sales results, which also beat expectations in most prints. Last month the BoE forecast growth of 1.8 percent this year and next - well below Britain's historic average - and last week government forecasts were gloomier, with Brexit dragging on the outlook.

Some economists said the BoE was overlooking signs of a steeper slowdown - as forecast last week by government economists - and the wage pick-up would prove a false dawn.

The tone of communications in the bank's statement also remained upbeat, particularly on the strength of the labour market.


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