Bank of England Holds Rates Steady, But Vote Shift Signals Hawkish Tone

The pound extended gains to a session high against the U.S. dollar Thursday after the Bank of England's Chief Economist cast his vote for a rate increase, a move that may tip the balance towards a hawkish August meeting even as the economy continues to show signs of a slowdown.

Andy Haldane changed his vote from the last meeting towards favoring a hike in the BoE's 'Bank Rate', which currently sits at 0.5% and has only been lifted once since the global financial crisis. The overall vote of the nine members of the Bank's Monetary Policy Committee was 6-3 to hold rates steady, but the shift in tone could be setting markets up for an August rate hike. The Bank also vote unanimously made no changes to its £435 billion quantitative easing program. 

"While modest by historical standards, the projected pace of GDP growth over the forecast was nevertheless slightly faster than the diminished rate of supply growth, which averaged around 1.5% per year," the BoE said. "As a result, a small margin of excess demand was projected to emerge by early 2020, feeding through into higher rates of pay growth and domestic cost pressures."

"Nevertheless, CPI inflation continued to fall back gradually as the effects of sterling's past depreciation faded, reaching the 2% target in two years," the BoE added.

Those voting for a hike noted there appeared to be an upside risk to the Bank's wage growth forecast. Leading indicators suggest wage growth will continue to outpace the MPC's forecast of 2.75% for the year as a whole. (2/2) pic.twitter.com/d7CSW7cvv5

— Capital Economics (@CapEconUK) June 21, 2018

Sterling rose nearly a full point to 1.3201 immediately following the Bank of England release, but still sits some 8.17% from its 2018 peak of 1.4376 on April 16. 

BoE Governor Mark Carney is set to address to business and financial market leaders later today in central London, in what is known as the annual Mansion House speech, with investors now primed for any clues as to whether the Bank is ready to gently hike rates as inflation hovers around its 2% target.

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