Bank of England keeps policy rate on hold, likely to hike in August

As widely anticipated, the Bank of England kept its monetary policy on hold today. The central bank also kept the bond programme unchanged. The MPC was split in its decision with Haldane, McCafferty and Saunders advocated to increase the bank rate by 25 basis points. Chief economist Andrew Haldane is new in the hawkish camp. According to the minutes the hawks “felt that the economy was developing broadly in line with the May Inflation Report forecasts, but the most recent indicators of labour demand and pay settlements indicated some upside risks”.

Markets saw the decision as hawkish with stronger sterling and higher rates. Market pricing suggests close to 50 percent chance of a 25 basis points rate hike in August and a full hike is priced in at the end of 2018.

The central bank did not release any new inflation report but the minutes stated that “inflation is expected to pick up by slightly more than projected in May in the near term, reflecting higher dollar oil prices and a weaker sterling exchange rate”. However, the committee’s “collective judgement” is that recent economic developments have moved more or less in line with projection in May. Those projections were conditioned on “a gently rising path for Bank Rate over the next three years”, that is market expectations which roughly suggest 25 basis points annual rises in the bank rate over the next few years, noted Nordea Bank in a research report.

The minutes repeated that “any future increases in Bank Rate were likely to be at a gradual pace and to a limited extent”. Furthermore, the MPC “intends not to reduce the stock of purchased assets until Bank Rate reaches around 1.5 percent”.  The decision taken today reinforces the case for a rate hike in August.

“For now, however, we stick to our forecast that the Bank of England leaves its policy rate unchanged throughout 2018 and 2019. We expect a bleak economic development going forward which, coupled with the fading inflationary boost from currency development, will hold back inflationary pressures”, added Nordea Bank.

At 16:00 GMT the FxWirePro's Hourly Strength Index of British Pound was slightly bullish at 72.6197, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at 15.2824. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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