The Bank of England (BOE) kept its main interest rate unchanged Thursday but two policymakers unexpectedly voted in favor of an immediate rate hike, boosting the prospect of rising borrowing costs in May.
In the second Monetary Policy Committee (MPC) review of the year, the U.K.’s central bank held rates at their current 0.5 percent level amid lower-than-expected inflation figures and modest improvements to wage increases.
However, policymakers Ian McCafferty and Michael Saunders said economic conditions were such that now should be the time for rates to increase for only the second time since the financial crisis a decade ago.
Sterling surged to a fresh seven-week high against the dollar shortly after midday, hitting $1.4220 after two hawkish members surprised investors in calling for a rate increase.
The U.K. currency also briefly jumped to its highest level in nine months against the euro on the news, spiking 0.5 percent to hit 86.950 pence on the news. Sterling has since pared some of its gains, while Britain’s stock market was unmoved by the rate decision.
Ahead of the BOE’s decision, economic data showed inflation easing but still staying above the 2 percent target at an annual rate of 2.7 percent, while wage increases were seen only hesitantly rising.
Collectively, the policymakers at the central bank said “ongoing tightening” would probably be necessary in order to bring inflation back to its 2 percent target.
BOE Governor Mark Carney had startled markets in February by indicating monetary policy would need to be tightened “somewhat earlier” and “by a somewhat greater extent” than the roughly two-and-a-half hikes over three years that were already priced into the market.
On Thursday, the BOE said recent economic data had since reaffirmed Carney’s view. Threadneedle Street is still thought to want to raise interest rates over the coming months — and could do so as soon as May.
“Given the prospect of excess demand over the forecast period, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a more conventional horizon,” the bank said in its meeting minutes.
The BOE made its first interest rate hike in a decade late last year in a bid to contain inflation, but has since signaled “very gradual” further increases over the next three years which would most likely be tied to progress over Brexit negotiations.
“Numerous MPC members, including the governor, have said that a rate hike is in the offing but the fact that you now have two members of the MPC saying ‘yes, now is the time’… I think that is a very strong signal that the overall committee is prepared to go in May,” Peter Dixon, senior economist at Commerzbank, told CNBC on Thursday.
Despite seeing the best signs of a recovery since the June 2016 Brexit vote, Britain’s economic growth still lags behind that of its main trading partners amid a broadly-based global upswing. Fears remain that domestic politics and uncertainty over Brexit outcomes could still impede a re-joining of this faster global growth.
“The BOE seems to be re-opening the playbook it used ahead of the November 2017 rate hike. Step one, signal to markets that a hike could come soon. Step two, let a couple of known hawks dissent in a policy vote shortly thereafter. Step three, hike rates,” Kallum Pickering, senior U.K. economist at Berenberg, said in an email.
— CNBC’s Natasha Turak contributed to this report.
