BoE holds fire amid rate hike expectations

The Bank of England (BoE) left interest rates and its asset purchase target unchanged on Thursday, as an improving economy continues to add to speculation that a rate hike could be round the corner.

As expected, the bank decided to hold off on adding to the £375 billion ($628 billion) of asset purchases it has unleashed over previous years and kept its main benchmark rate at a record low of 0.5 percent. The decision tallied with a Reuters poll of 55 economists who all predicted that the current rate would remain unchanged.

The U.K. pound was relatively unchanged after the news and has approached its weakest level in eight weeks versus the dollar in recent trading sessions.

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Despite not announcing any change in policy, the "Old Lady of Threadneedle Street" is poised for action in the not-too-distant future. The same Reuters poll this week gave a 40 percent chance of a rate hike before the end of 2014. Analysts from Santander evenly boldly gave the possibility a 100 percent chance by the end of the year, eyeing a 25 basis point rise in the fourth quarter.

imon Dawson | Bloomberg | Getty Images

The BOE will update its economic forecasts next week and the minutes of Thursday's discussions will be released on August 20, which market watchers will comb through to see if there were any dissenting voices calling for a policy change. This week's two-day meeting was the first for Nemat Shafik with Kristin Forbes, a former economic adviser to former U.S. President George W. Bush, also recently joining the board.

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"It seems certain some members of the MPC (monetary policy committee) are moving closer to the time when we could well get a split vote...when the minutes are released in a couple of weeks we may well see some evidence of dissent starting to appear," Michael Hewson, senior market analyst at CMC Markets, said in a morning note.

The BoE has to delicately weigh up any future move with concerns over high levels of household debt, a potential bubble in the housing market and low wage growth. On the plus side the data has been improving and the U.K. has reached what has been termed "escape velocity." Growth is running at an annualized rate of 3 percent, inflation is narrowly below desired levels and unemployment may drop below 6 percent before the year is out.

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"The MPC (monetary policy committee) is left with its continuing conundrum," City analyst David Buik, said in a morning note before the decision. "With the EU economy having a great stab of falling around its ears, (Mark) Carney's committee will surely be in no hurry to jack rates up in the foreseeable future in the current uncertain climate. Even a symbolic rise of 0.25 percent in November is far from a 'nailed on certainty'."

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