No less than three MPC members voted to raise rates. Five voted to leave them on hold. This is a big surprise. IT shows that some members are nervous about rising inflation and are ready to risk economic growth in order to limit inflation.
GBP/USD jumped from under 1.27 to a high of 1.2793.
The dissenters are Saunders, McCafferty, and Forbes, which had already voted for a hike in the past. Everybody agrees that any rate rise will be gradual and limited. They also assume that headline CPI could exceed 3% by the autumn.
The BOE and the pound
And what about the pound? They certainly cite the rising exchange rate as a reason for inflation. Some see less slack in the economy.
However, other indicators show a slowdown. Looking forward, political uncertainty could further hurt the economy.
With this vote, is the BOE trying to push the pound higher but eventually not raise rates?
The break above 1.2770 is not confirmed just yet. If we break higher, further resistance awaits at 1.2825, followed by 1.29. Support awaits at 1.27 and 1.2615.
Here is how it looks on the 1-minute chart. Below please find important background information.
The Bank of England was expected to leave the interest rate unchanged at 0.25%. In previous meetings, one member voted in favor of raising the interest rates because inflation is on the rise.
GBP/USD was trading around 1.27 ahead of the event.
The decision by the Bank comes on the background of ongoing political uncertainty in the UK. Coalition talks between the Theresa May’s Conservative Party and the reactionary DUP have not concluded just yet. The vote of confidence has been pushed back from Monday to Wednesday.
The BOE has a tough dilemma. Brexit sent the pound plunging and this pushes prices of imported goods higher. So, inflation is higher. It reached 2.9% in May. The most recent wage data for April shows that wages are rising at a slower pace of 2.1%.
Standards of living are falling and Brits are buying fewer non-essentials and focusing on essentials. The retail sales report earlier today was a bitter disappointment.
However, raising the interest rates could hurt the economy by curbing lending. Growth has already slowed quite markedly: 0.2% in Q1 2017.
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