BoE Maintains Interest Rates At 0.5%; Two Members Vote For Hike

The dissent from two members, Ian McCafferty and Michael Saunders, to vote for a hike is in contrast to the February meeting, at which all seven members voted unanimously to hold rates.

In the aftermath of the bank's announcement, sterling climbed 0.01% against the dollar, while the FTSE 100 continued its decline, falling 1.32% since the market opened today.

Inflation falling to 2.7%, announced by the Office for National Statistics on Tuesday (20 March), relieved some pressure on the BoE to boost rates, but it is still anticipated it will opt for a hike in its 10 May meeting.

'Picture remains bleak' despite inflation fall to 2.7% in February

According to minutes from the MPC's 21 March meeting, all members agreed any future increases in interest rates are to be at a "gradual pace and to a limited extent".

The MPC agreed on a positive outlook for global growth, but the minutes said Brexit remained "the most significant influence on, and source of uncertainty about, the economic outlook".

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 UK 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".

The BoE's decision follows the Federal Reserve's 21 March announcement it would raise US interest rates by 25bps in Jerome Powell's first meeting as chairman since taking over from Janet Yellen.

A more hawkish path from the Fed is expected over the next couple of years after the Federal Open Markets Committee voted unanimously to raise the Federal Funds target range from 1.25%-1.5% to the 1.5%-1.75% band, in light of a strengthening economic outlook in recent months.

Ben Brettell, senior economist at Hargreaves Lansdown, said the MPC's hawkish members McCafferty and Saunders are "worried that inaction now will mean rates will need to rise faster and further in future. Sterling jumped on the news, hitting a seven-week high against the dollar".

He added the BoE faces a "delicate balancing act", with inflation seemingly falling back towards the target of 2%, "as the effect of the weaker pound starts to filter out of the calculation".

Brettell also said a pick-up in wage growth "points to an erosion of slack in the labour market", and warned this "raises the prospect that a wage-price spiral could push inflation back up in future".

He added: "It now looks increasingly likely we'll see a rise to 0.75% at the Bank's May meeting. Beyond that the outlook is less clear.

"As ever the Bank is at pains to point out that the pace of interest rate rises will be gradual. Much will depend on how Brexit negotiations progress, but it's possible that further wage rises could force policymakers into a further rise this year."

It was also unanimously agreed the BoE would maintain its stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10bn.

In addition, the MPC agreed to maintain the stock of UK government bond purchases, which are also financed by the issuance of central bank reserves, at £435bn.