Bank of England holds rates at record low but surprises with 3 dissents

© Reuters. BoE holds on rates but 3 members call for 25 basis point hike

Investing.com – As expected, the Bank of England (BoE) decided on Thursday to keep interest rates unchanged at a record low as well as to make no changes to its asset purchase program, though members of the Monetary Policy Committee (MPC) surprised markets with three dissents

Specifically, the BoE left the benchmark interest rate at a record low of 0.25%, in line with market forecasts.

The decision to maintain interest rates was undertaken in a vote with 5 members in favor and 3 opting for a 25 basis-point rate hike.

The vote surprised markets that had expected a vote of 7-1.

Furthermore, all MPC members agreed to leave its asset purchase program unchanged as expected at £435 billion as well as to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion.

The BoE noted the recent rise in inflation to 2.9% and indicated that it expect it to continue to accelerate.

“Inflation could rise above 3% by the autumn, and is likely to remain above the target for an extended period as sterling’s depreciation continues to feed through into the prices of consumer goods and services,” the BoE said in the release.

“The 2.5% fall in the exchange rate since the May Inflation Report, if sustained, will add to that imported inflationary impetus,” it added.

The BoE further pointed to the decline in GDP growth in the first quarter and said that it was due in part to weaker household spending.

“It remains to be seen how large and persistent this slowdown in consumption will prove,” the BoE said.

The MPC also took note of uncertainty as the U.K. continues to move forward with its plans to leave the European Union (EU).

“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,” it explained.

The BoE further warned that it could offset the effect of weaker sterling on inflation at the cost of higher unemployment and, “in all likelihood, even weaker income growth”.

“For this reason, the MPC’s remit specifies that, in such exceptional circumstances, the Committee must balance any trade-off between the speed at which it intends to return inflation sustainably to the target and the support that monetary policy provides to jobs and activity,” it explained.

Investors will undoubtedly look for further details at 4:00PM ET (20:00GMT) when BoE governor Mark Carney will deliver a speech at the Mansion House Merchants and Bankers dinner.

Following the release, the pound bounced back from earlier losses caused by weak retail sales data. GBP/USD traded at 1.2777 from around 1.2699 ahead of the publication, EUR/GBP was at 0.8729 from 0.8792 earlier, while GBP/JPY traded at 140.66 compared to 139.31 before the announcement.

Meanwhile, European stock markets traded lower. London’s FTSE 100 fell 1.16%, the Euro Stoxx 50 lost 1.18%, France's CAC 40 traded down 1.03%, while Germany's DAX shed 0.90%.