Bank of England leaves policy unchanged but 3 members vote for a hike

LONDON — The Bank of England, as expected, left monetary policy unchanged on Thursday.

That means interest rates stayed at a record low of 0.25%, and the bank’s QE programmes remain capped at £435 billion, despite the surge in the rate of inflation to the highest level since mid-2013.

The bank’s Monetary Policy Committee voted 5-3 in favour of holding rates at their current levels. The vote’s composition had been expected to be 7-1 in favour of a hold.

The MPC members to vote for a hike were the outgoing Kristin Forbes, as well as Ian McCafferty and Michael Saunders.

Those members cited concerns about inflation overshooting its government mandated target of 2% substantially in recent months.

Falling sterling has pushed up the price of importing goods, passing through to everyday items that regular Brits buy.

This is now showing up in official inflation data, which at the latest reading sat at 2.9%.

In normal circumstances, such high inflation would likely push the bank to increase rates, but it must also balance the fact that the wider British economy is set to slow sharply in 2017, driven by Brexit-related uncertainty, and that the sharp growth in inflation seen in the UK right now is likely to be temporary.

While the bank held rates, the dissent of three members of the MPC suggests that a hike in rates — likely back to the 0.5% level where the bank’s base rate stood for close to seven years before last summer — could be close.

“Inflation could rise above 3% by the autumn, and is likely to remain above the target for an extended period as sterling’s depreciation continues to feed through into the prices of consumer goods and services,” the bank’s monetary policy statement said.

“The 2½% fall in the exchange rate since the May Inflation Report, if sustained, will add to that imported inflationary impetus.

“In contrast, pay growth has moderated further from already subdued rates, even as the unemployment rate has fallen to 4.6%, its lowest in over 40 years.”

As the announcement is a normal MPC meeting, there is no associated press conference, however Governor Mark Carney will speak later on this evening, delivering a speech at London’s Mansion House alongside Chancellor of the Exchequer Philip Hammond.

The pound jumped on the announcement, with the bank’s hawkish tone spurring investors to buy the currency. Here is the chart:

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