Fundamental Comment

BOE holds interest rate with 6-3 vote, alters guidance

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The Bank of England opted to hold the benchmark interest rate at 0.50 percent, moving in line with expectations, with an unexpected 6-3 vote from the monetary policy committee members.

MPC member Andy Haldane joined Ian McCafferty and Michael Saunders, voting to raising the BOE borrowing cost to 0.75 percent.

The three dissenting members cited that the first-quarter’s slowdown was temporary and the benefits of waiting for additional information were limited.

They also argued that “a modest tightening of monetary policy at this meeting could mitigate the risks of a more sustained period of above-target inflation.”

Additionally, the central bank announced a new guidance regarding the beginning of selling their asset purchases, revealing that this would start once interest rates have reached 1.5 percent. That was sooner than the previous guidance of nearly 2 percent.

As of 11:11 GMT, the British pound erased its earlier losses to trade at $1.3201, compared to the session’s seven-month trough of $1.3101.

The sterling got support with one additional member calling for an interest rates hike, thereby raising the case for a possible rate increase in August.

Recently markets have been pricing a 50 percent change the BOE would hike rates in August, but after the unexpected split it seems that the probability will increase near 80 percent.

MPC members stressed that their previous view that first-quarter weakness was temporary and linked to unusually poor weather appeared “broadly on track.”

“Household spending and sentiment bounced back strongly, and a sharp fall in factory output in April could reflect firms having built up excess stocks during the period of bad weather in the first quarter of the year,” the BoE said.

The BOE predicted on Thursday that economic growth would rebound to 0.4 percent in the second quarter from 0.1 percent in the first three months.

Later in the day, BOE Governor Mark Carney could provide more evidence about outlook for the economy and its readiness for Brexit, as he gives a major speech to the London’s financial services industry, scheduled for 2015 GMT.

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