Bank of England holds rates, signals it is ready to hike again in May

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23 March 2018


The Pound briefly touched its strongest position since the beginning of February on Thursday after the Bank of England left interest rates unchanged, but signalled it is ready to hike rates again at its next monetary policy meeting.

he MPC’s vote on rates was unexpectedly split 7-2 in favour of keeping rates steady at 0.5%, with the two most hawkish members on the Bank of England’s rate-setting committee surprisingly voting in favour of an immediate interest rate hike. Members Ian McCafferty and Michael Saunders, both of whom were the first two to call for an increase in rates in 2017, were the two dissenters. This was a departure from the unanimous vote at February meeting and came as somewhat of a surprise given much of the market that had pencilled in another unchanged vote.

The BoE’s communications were hawkish, stating that prospects for global GDP growth ‘remain strong’ and that inflation is expected to remain above the 2% target. The minutes reiterated that ‘given the prospect of excess demand over the forecast period, an ongoing tightening of monetary policy would be appropriate to return inflation sustainably to its target’.

Sterling reacted in an aggressive fashion to the news, with investors briefly sending the currency sharply higher. Gains for the currency did, however, prove short lived, with the Pound retreating to end the day around half a percent lower. We think the correction in the currency was largely down to the fact that the split vote confirmed something that the market had already been mostly pricing in prior to the meeting; that interest rates are likely to be raised again at the BoE’s May meeting.

Financial markets are now placing around a 75% chance of a hike in May. We think it is pretty much a done deal, particularly should inflation news surprise to the upside in the interim.

Euro slips after Eurozone PMIs fall sharply in March

Earlier in the day the Euro received little love from the latest set of PMI data, all of which came in considerably less than expected. Activity in both the services and manufacturing sectors of the currency bloc slowed rather sharply this month, with the composite index slumping to 55.3 from 57.1 after investors had eyed only a modest slowdown. While still comfortably above the level of 50 that denotes expansion, this sharp decline reinforces our view that the European Central Bank will be in no rush whatsoever to raise interest rates until well into 2019.