Bank of England stands pat in September, likely to hike rate by 25bps in Q1 2018

As was widely anticipated, the Bank of England kept its key bank rate and stock of bonds unchanged. However, a majority of the committee saw a withdrawal of stimulus appropriate in the months ahead. The MPC decision was split with a 7-2 vote in its decision to keep the bank rate on hold. As at the previous meeting in June, McCafferty and Saunders voted for a rate hike by 25 basis points. The new MPC member Ramsden voted as expected with the majority. The committee voted unanimously to keep the stock of government bonds at GBP 435 billion and the stock of corporate bonds at GBP 10 billion.

Today’s decision was greatly in line with expectations as not much has happened since the August meeting. The Brexit negotiations are proceeding seemingly without progress. The minutes from the MPC meeting reiterated that the policy “could need to be tightened by a somewhat greater extent over the forecast period than current market expectations”. But all members agreed that “any rises in the Bank Rate would be expected to be at a gradual pace and to a limited extent”. After all, the growth outlook is weak and it is difficult to see domestic price pressure building to any vital extent, despite the low jobless rate.

“We stick to our forecast that the Bank of England will increase the bank rate by 25 bps in Q1 2018, and then leaving the bank rate unchanged throughout 2018 and 2019”, noted Nordea Bank in a research report.

However, a possibility of rate hike during November meeting cannot be ruled out. The meeting will also be accompanied with an inflation report. This is also the signal that Bank of England sent during today’s meeting. The majority thought that “some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target”. A sooner rate hike might underpin the value of the pound and thereby help control inflation, added Nordea Bank.

At 17:00 GMT the FxWirePro's Hourly Strength Index of British Pound was bullish at 74.66, while the FxWirePro's Hourly Strength Index of US Dollar was bullish at 90.526. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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