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Sterling leaps in anticipation of May rate rise

Sterling leaps in anticipation of May rate rise

The Bank of England kept interest rates steady on Thursday but two policymakers unexpectedly voted for a hike, boosting confidence among investors that borrowing costs will rise in May for only the second time since the 2008 financial crisis.Ian McCafferty and Michael Saunders - the first officials to call for rates to rise previous year - said it was now time to push them above the emergency level at which they have sat for most of the past decade.

Against the dollar it ended up below where it had traded before the BoE's Monetary Policy Committee voted 7-2 to keep its main rate at 0.5 percent.

The Bank of England's Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment.

"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.

Official data Thursday showed that British retail sales rebounded in February from the previous month, boosted by growth in food and online purchases.

While the other seven members of the MPC voted to leave rates unchanged, the tone of the minutes of this week's meeting left the City convinced that an upward move was on the way.

The Bank has been paving the way for a rate rise, but must tread lightly until there is richer evidence of growing inflationary pressures, to avoid unnecessarily placing a speed bump in the way of economic activity'.

"We still think that the MPC will hike interest rates in May", Paul Hollingsworth, senior United Kingdom economist at Capital Economics, said following Thursday's announcement.

GettyGovernor of the Bank of England Mark Carney
GettyGovernor of the Bank of England Mark Carney

For the two dissenters on the MPC - Ian McCafferty and Michael Saunders - this was enough to trigger the need for an immediate rate rise, according to the minutes.

The UK´s unemployment rate has meanwhile dipped, reverting to the lowest level since 1975, after a brief rise.

Inflation will also have a significant bearing on what the Bank of England chose to do.

But economists believe it could add to the argument for raising rates sooner rather than later.

Burton Mills - With an agreement reached on a Brexit transition deal, the Bank of England remains on course to hike interest rates in May. The firming of shorter-term measures of wage growth in recent quarters and a range of survey indicators suggest pay growth will rise further in response to the tightening labour market.

"The rate rise at the end of previous year meant some people now pay more on their mortgage". But while that pound-driven increase in prices is expected to ebb, the Bank of England believes the pick-up in wages will continue to support inflation.

As such, the Reserve Bank of Australia (RBA) is now seen as unlikely to be considering near-term monetary policy adjustment.

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