On Thursday, the Bank of England decided to keep interest rates and its two asset purchase programs unchanged. However, the pound rallied to a one-year high against the dollar and near to a two-month high versus the euro after the monetary statement revealed that the central bank might raise interest rates sooner than markets anticipate.
During European trading hours, the majority of the Monetary Policy Committee concluded that interest rates should remain steady at 0.25%, while the central bank should maintain government bond purchases at 435bn pounds and corporate bond purchases at 10bn pounds.The decision was taken as policymakers aimed for accommodative policy to support growth and the labor market even as inflation, currently at 2.9%, is running above the BOE’s target of 2%.
However, the minutes of the meeting hinted that if the British economy develops as expected, then the MPC members see scope for stimulus reduction in the coming months "to a somewhat greater extent" than markets have forecasted. According to the statement, MPC members judged that interest rates should be raised gradually and to a "limited extent" over the coming months as they anticipate inflation to break above 3% in October and to continue fluctuating above the target for a couple of years, while unemployment has declined to a 42-year low. Markets are currently pricing a probability of 50% for rates to go up in November and an 80% chance in February 2018.
Besides that, the statement mentioned that risks to the economic outlook remain on track given the uncertainty around the Brexit talks and its impact on consumer and business behavior after the country leaves the European union. For that reason, the minutes noted that the committee will closely monitor any adjustments to the above that might affect the economic outlook and act accordingly in order to achieve its inflation goals.
Turning to the vote results, those were in line with forecasts. Seven out of nine members agreed to keep rates unchanged despite rumors that the BOE’s chief economist, Andy Haldane, would follow the hawks, Ian McCafferty and Michael Sanders, who voted for a rate hike.
Looking at the reaction in forex markets, the pound touched a one-week low of $1.3149 in the wake of the decision but while markets were going through the statement, the currency surged by 1.70% to a one-year high of $1.3371, before retreating to $1.3357. Euro/pound tumbled by 1.24% near to a two-month low of 0.8874.
