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Bank of England Holds, Leaves Door Open for August Hike

Published 06/21/2018, 07:00 AM
Updated 06/21/2018, 07:00 AM
© Reuters.   Bank of England keeps interest rates on hold, lays groundwork for August hike

© Reuters. Bank of England keeps interest rates on hold, lays groundwork for August hike

Investing.com - The Bank of England left interest rates on hold on Thursday, in what was a widely expected decision, but left the door open for an August rate hike as policymakers judged that a slowdown in the economy in the first quarter was temporary.

The BoE’s Monetary Policy Committee was split on the decision to keep interest rates unchanged at 0.5% with three out of nine members voting in favor of a quarter point increase.

BoE Chief Economist Andy Haldane joined Michael Saunders and Ian McCafferty to vote in favor of a rate hike. It was the first time a BoE chief economist has dissented since 2011, fueling expectations for an August rate hike.

Officials are now more confident that a slowdown in the first quarter is temporary, the bank said in its rate statement. Household spending and sentiment have bounced back strongly and inflation is expected to pick up slightly more than expected in the near-term.

All MPC members agree that future rate increases are likely to be gradual and limited and that any reduction in quantitative easing will be conducted at a "gradual, predictable pace," the bank said.

The central bank updated its guidance about when it might start unwinding its stimulus program, saying this could come once rates have reached around 1.5%, sooner than previous 2% guidance.

The pound rallied after the announcement, with GBP/USD climbing 0.3% to 1.3210, up from a seven-month low of 1.3102 reached earlier.

The economy is expected to grow by 0.4% in the current quarter after slowing to near stagnation in the first three months of the year.

That slowdown saw the BoE hold off on an expected rate increase last month and prompted investors to rethink their expectations about how fast borrowing costs will rise.

At its May meeting the BoE said it wanted to signs of stronger economic growth before it prepared to raise interest rates, but economic data has been mixed since then.

Inflation has fallen to a one-year low and wage growth has slowed, but retail sales have picked up and the dominant UK services sector is showing signs of bouncing back after a recent slowdown.

BoE Governor Mark Carney was to give what would be a closely watched speech outlining the outlook for the economy and its preparedness for Brexit later Thursday.

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