Pound Gains as Bank of England Hints at Future Rate Hikes
The Bank of England has held key interest rates steady at 0.25% Thursday, sending the pound up in midday trading as it hints at rate hikes.
The central bank's Monetary Policy Committee voted seven to two to keep the rates steady despite a spike in inflation reported earlier this week.
The committee voted unanimously to maintain the stock of pound-denominated non-financial investment-grade corporate bond purchases at £10 billion ($13.25 billion) and to maintain the stock of UK government bond purchases at £435 billion.
The pound gained after the decision was made, up 0.72% against the dollar $1.3305.
The central bank is in a dilemma about the course of possible rate rises after inflation hit a four-year high of 2.9% earlier this week but wage growth came in at just 2.1%. Both figures were released earlier this week by the Office for National Statistics.
The Bank of England has an inflation target of 2%.
The committee said Thursday that the economy looked little more robust that what had been expected in the central bank's August inflation report. "Overall, the latest indicators are consistent with UK demand growing a little in excess of this diminished rate of potential supply growth, and the continued erosion of what is now a fairly limited degree of spare capacity," the bank said.
The MPC indicated that rates may have to be lifted sooner than expected.
"All MPC members continue to judge that, if the economy follows a path broadly consistent with the August Inflation Report central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations," the bank said Thursday.
The market had been pricing in a 42.7% chance of a rate rise before the end of the year before today's decision.
The committee also indicated that the economy stays on this course, "some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target. "
However, the MPC warned about Brexit. "Monetary policy cannot prevent either the necessary real adjustment as the United Kingdom moves towards its new international trading arrangements or the weaker real income growth that is likely to accompany that adjustment over the next few years," the central bank said.
"There remain considerable risks to the outlook, which include the response of households, businesses and financial markets to developments related to the process of EU withdrawal," it added.
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