BoE keeps rates unchanged, but Haldane joins 'hawks'

The turnout of the Monetary Policy Committee's meeting on Wednesday, which was published today, was more hawkish than expected, as the Bank of England's chief economist joined the ranks of those who were calling for an immediate hike in Bank Rate.

Andrew Haldane joined Ian McCafferty (who is to leave in the autumn) and Michael Saunders in voting for a 25 basis point increase in rates, with the MPC's remaining six members having voted to stay put.

Most economists had anticipated that the prior meeting's split of 7 to 2 would be unchanged.

Thus, Bank Rate remained a 0.5% and the amount of government and corporate bonds purchased via central bank reserves was kept at £435bn and £10.0bn, respectively.

In reaction, as of 1225 BST the pound was strengthening 0.22% against the US dollar to 1.32035, having reached an intra-day low of 1.3102 previously.

McCafferty was to leave the MPC in September, with Jonathan Haskel having already been named to replace him.

To take note of as well, BoE Governor Mark Carney was scheduled to deliver his Mansion House speech later on Thursday evening.

Commenting on the possible rationale underlying Wednesday's policy debate at the Old Lady on Threadneedle Street, Michael Hewson at CMC Markets UK said: "What policymakers probably didn’t anticipate was the sharp fall in the pound that we’ve seen since its April peaks with the pound down over 7% against the US dollar while oil prices have remained steady. It is true that wages have stalled a little in the past few months but we’ve also seen a significant rebound in economic activity since the end of Q1.

"It is against this backdrop that today’s hold needs to be seen as the fall in the pound is likely to make it much more difficult for the Bank of England to meet its newly revised inflation target, particularly with the US dollar being so strong and the Federal Reserve being on an aggressive tightening cycle, with the potential for another 2 US rate rises this year."

For his part, Samuel Tombs at Pantheon Macroeconomics said: "We still struggle too see how the data will warrant a hike in August. In particular, the rebound in services output would have to be exceptionally strong in April for GDP growth in Q2 to meet its 0.4% forecast; we still look for just 0.2% growth.

"The Committee also has been sensitive to uncertainty created by Brexit negotiations in the past. The danger that Brexit talks fail to make any progress over the next few months, causing elevated concern among businesses, is very real, given that Mrs. May still holds unrealistic expectations for what can be achieved. So, while it’s not out of the question that the MPC raises Bank Rate in August, we continue to expect the Committee to wait until next year."

Strategists at Bank of America-Merrill Lynch appeared to be in a similar frame of mind, saying: "Our view is that August will ultimately not see a hike, but the Bank of England (BoE) will be keen to keep the issue live today. This, together with the possibility the Governor alludes to higher terminal rates than are priced (perhaps with another reference to the economy's "speed limit" in his Mansion House speech this evening) leads us to reemphasize our 5s7s Gilt steepener."