Published: Fri, June 16, 2017
Markets | By Lucia Cruz

UK central bank surprises with split decision on rate hike

UK central bank surprises with split decision on rate hike

The Bank of England held interest rates at their all-time low of 0.25% but surprised markets with news of a 5-3 split on its monetery policy committee (MPC).

Sterling remains vulnerable due to the current political uncertainty that has arisen after the United Kingdom elections and the difficulties Prime Minister Theresa May is facing in forming a government.

Despite growing signs of an economic slowdown, committee members Michael Saunders and Ian McCafferty joined Kristin Forbes, who was the only vote for a rise in May, in voting for an immediate interest rate rise to combat rising inflation.

The BoE's latest policy meeting showed three MPC members called for a rate rise.

Financial markets were pricing in a roughly 50 percent chance of an interest rate hike by next June, compared with 20 percent earlier this week, Societe Generale fixed income strategist Jason Simpson said.

Ben Brettell, senior economist at Hargreaves Lansdown, said there was a chance of a rate hike if inflation continues to smash expectations.

The outcome of the UK's recent general election also complicates the prospects for Brexit talks.

With wages growth failing to match the rises in inflation, consumers are limiting how much they spend in stores and online.

With the United Kingdom economy struggling, economic and political uncertainty magnified by the election result and earnings growth remaining weak, a compelling case can still be made for the Bank of England to hold off from any interest rate hikes - not just now but for some time to come. The bank is expected to keep the rate on sight deposits unchanged at -0.75 percent and the target range for the three-month Libor between -1.25 percent and -0.25 percent.

Attention is now turning to the future make-up of the MPC.

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Hammond and Carney had been due to address an annual dinner for financiers in the City of London later on Thursday. The 2½% fall in the exchange rate since the May Inflation Report, if sustained, will add to that imported inflationary impetus.

This is higher than the BoE had predicted.

Prime Minister May is trying to get a commitment of support from Northern Ireland's main pro-United Kingdom party to allow her to pass legislation.

The Bank left its benchmark interest rate unchanged at a record low 0.25%.

"Inflation was projected to overshoot the target by more than previously expected and to remain above it throughout the three-year forecast period", the bank said in minutes from its regular policy meeting.

Retail sales fell by more than expected in May as consumers were hit in the pocket by high inflation, official data showed Thursday.

"The squeeze on the United Kingdom consumer from weak real wages will only filter through slowly but it is coming", Societe Generale strategist Kit Juckes said before the report's release.

DFS Furniture (DFSD) summed up the problems as its shares plunged 21% after warning profits would be lower this year as consumers bought fewer sofas due to the mounting economic and political uncertainty.

"The continued growth of employment could suggest that spare capacity is being eroded, lessening the trade-off that the MPC is required to balance and, all else equal, reducing the MPC's tolerance of above-target inflation", the BoE said.

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