GBPUSD - Rate hike in USA; market awaits BoE meeting….

Dianna Christensen
March 24, 2018

The Bank of England (BoE) said on Thursday that it had made a decision to keep its main interest rate at 0.5%, as it weighed high United Kingdom inflation against Brexit uncertainty.

The BOE said that a majority of officials on its nine-member Monetary Policy Committee agreed to keep the central bank's benchmark interest rate steady this month at 0.5%.

While the 7-2 vote saw rates remain unchanged, the report confirmed the bank's view that "ongoing tightening of monetary policy" would be needed to bring inflation back to its 2 per cent target.

In this respect, the accompanying statement and press conference from the central bank will likely take centre stage, with comments from Governor Mark Carney, liable to make or break Sterling's lead.

The decision saw the first split vote on the MPC since rates were raised last November, from 0.25% to 0.5%. The steady absorption of slack has reduced the degree to which it is appropriate for the MPC to accommodate an extended period of inflation above the target.

This is significant in that impasses remain, with no conclusion yet reached regarding the Irish border - a realm of negotiations that UK Prime Minister Theresa May will have to iron out in the next three months.

The Bank said there had been "few surprises" since its last set of quarterly forecasts last month, although it noted that inflation fell by more than it expected to a seven-month low of 2.7% in February.

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Michael Hewson, chief analyst at CMC Markets, said Wednesday's better than expected wages growth and unemployment data "shifted the calculus on a possible move on United Kingdom rates to the May meeting". "With the economy holding up relatively well, the MPC less tolerant now of above-target inflation than in the recent past, and a desire to return interest rates to some new "normal" level, we think that interest rates will rise three times this year, and twice further in 2019 - more than markets expect", Hollingsworth adds.

There was also agreement future rate climbs would be "at a gradual pace".

"Beyond that the outlook is less clear", he added, noting the uncertainties surrounding Britain's discussions to leave the European Union.

"The odds of a more hawkish tilt at today's Bank of England policy meeting have risen materially following what has been a relatively constructive week of Brexit developments and United Kingdom data", said Viraj Patel, a strategist at ING.

It said in pursuing its objective of a 2% inflation rate the "main challenges for the Committee had continued to be to assess the economic implications of the United Kingdom withdrawing from the European Union and to identify the appropriate policy response to that changing outlook, including to the substantial depreciation of sterling that had been associated with the decision".

At its February meeting, the panel had hinted it could raise rates in May as inflation was above target and wages were rising.

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