Europe Economy

BoE holds fire but set to lead on rate hike


The Bank of England (BoE) left its monetary policy unchanged on Thursday but looks increasingly likely to become the first central bank in a developed nation to hike interest rates since the global financial crash of 2008.

The BoE left interest rates at a record low of 0.5 percent and its asset purchase target unchanged at £375 billion ($629.6 billion) as expected on Thursday.

Yields on benchmark 10-year U.K gilts were relatively unchanged, holding steady at 2.624 percent. Sterling also showed little movement against the dollar, ticking slightly lower to $1.6780 after starting Thursday's session at around $1.6788.

However, despite policy not changing on Thursday investors are increasingly anticipating a move by the Bank in the first half of next year. BoE Governor Mark Carney said as much in an interview with a local newspaper last week.

Read MoreBritain seen growing faster than expected in 2014

Speaking to The Northern Echo, he said that interest rates could rise ahead of the next General Election in the U.K., due in May 2015, but he wants to see more job creation before he intervenes. The Bank's main interest rate is the benchmark for all sorts of mortgages and loans in the U.K. and indicates how much people pay to borrow cash. It currently stands at 0.5 percent.

imon Dawson | Bloomberg | Getty Images

This comes as the International Monetary Fund (IMF) delivered a sparkling report for the U.K.'s economic recovery, declaring it would be the fastest-growing country in the G-7 this year. The IMF also upgraded its growth forecast to 2.9 percent in 2014, up from a January estimate of 2.4 percent, and expects to see growth of 2.5 percent growth in 2015.

The Bank of England has witnessed several high-profile staff reshuffles in recent weeks and has also reformulated its forward guidance. The change has led to some confusion as to when rate hikes could begin in the U.K. Analysts at Societe Generale predict the first rate increase will be a 25 basis point rise in February next year.

"(In February) the MPC switched its emphasis to the likely rate in the medium term (which we take to be three years) which it expect to be in the range of 2-3 percent. We think that is too low. Once tightening starts, we expect a much more rapid rate of increase to reach 4.5 percent by 2018," the bank said in a morning note on Thursday.

BoE rate hikes will be very cautious: Pro

Read MoreIMF upgrades UK growth for 2nd time this year

With the U.S. Federal Reserve striking a definite dovish tone on Wednesday, it now appears that Carney and the BoE will lead developed nations out of the era of ultra-loose policy and be the first to start to "normalize" rates.

The minutes from the Fed's meeting on March 18-19 revealed that its committee was unanimous in its commitment to keeping interest rates low for the foreseeable future, which quashed fears of a sooner-than-expected rate hike. If the BoE were to act first then it would tally with expectations from legendary bond investor Bill Gross.

Gross, the co-founder and co-chief investment officer of Pacific Investment Management Co, took to the social media site Twitter back in February to state that the U.K. that would assume leadership of the "tightening pack", a reference to the tighter monetary policy that higher interest rates would represent.

Gross tweet

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