Bank of England keeps interest rate on hold, likely to hike in August

The Bank of England kept its key interest rate on hold today. This decision was not surprising after Governor Carney’s warning three weeks ago and a number of weak data releases. Still, the accompanying comments and the fact that two members of the Monetary Policy Committee – Ian McCafferty and Michael Saunders -  continued to advocate for an immediate hike, implies that the prospect of a hike in 2018 is more finely balanced than current market pricing would suggest, noted Lloyds Bank in a research report.

Significantly, the central bank dismissed most of the slowdown in the first quarter GDP growth as being temporary and continued to envisage a rebound in the second quarter GDP growth. While the subdued first quarter outturn signified that the full-year growth estimates was lowered, unchanged forecasts for 2019 and 2010 meant that the central bank’s broader views on the economy were left intact, stated Lloyds Bank.

The Bank of England viewed that that the economy might move into a state of excess demand in early 2020. Under these assumptions, the Bank’s inflation forecasts were downwardly revised a bit, with inflation now seen back to target at the end of two years and holding steady over the remainder of the forecast horizon.

“In our base case, assuming that economic activity bounces back in the second quarter and CPI inflation proves stickier over the coming months than it did in Q1, we expect the Bank of England to deliver a quarter-point increase in interest rates at the August meeting. At present, interest rate markets are attaching only a 50 percent probability to such an outcome”, added Lloyds Bank.

At 17:00 GMT the FxWirePro's Hourly Strength Index of British Pound was slightly bearish at -56.705, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at -36.0893. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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