Bank of England holds rates; hike seen sooner

The U.K. central bank kept monetary policy unchanged on Monday, as the stronger-than-expected Conservative electoral victory refocused markets on the possible date of the first interest rate hike.

The Bank of England held its benchmark interest rate at a record low of 0.5 percent, where it has stayed since March 2009. It also kept the size of its bond purchases under the quantitative easing program at £375 billion ($578 billion).

The bank's policy announcement was delayed because of last Thursday's general election, in which the incumbent Conservative Party gained enough votes to take a majority in parliament. This meant the center-right party was able to shed its coalition partner, the Liberal Democrat party, of the previous government.


The Bank of England
Simon Dawson | Bloomberg | Getty Images

The news boosted markets on Friday, due to relief that there would be neither a hung parliament nor lengthy deliberations over new coalition partners. Plus, the Conservatives are viewed as more business-friendly than either the centrist Liberal Democrats or the opposition center-left Labour Party.

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Given the result, analysts said that market forecasts for when the Bank of England would raise its key rate might move forward.

"The politics have dominated for quite some time in the U.K. in the run-up to the election, but now we are likely to see a focus back on the macroeconomics and certainly the macroeconomics in the U.K. speak for themselves: We are seeing a very solid backdrop in the growth picture and in the inflation picture and so we are likely to see a repricing in the U.K. rates market in favor of rate hikes at the beginning of next year," Phyllis Papadavid, senior global foreign exchange strategist at BNP Paribas, told CNBC on Monday.

Kit Juckes of Societe Generale said that any rate hikes would be gradual, but concurred that the Conservatives' victory could see forecasts for a starting date brought forward.

"Maybe the market's pricing of the first rate hike by the Bank of England will come forward a bit from the first half of 2016. But fiscal austerity is assured and will carry most of the burden of policy adjustment. Rates will rise, but slowly," said the London-based strategist in a research note on Monday.