Central Banks

Bank of England warns it may raise interest rates in 'coming months'

Key Points
  • Bank of England holds interest rates steady at 0.25 percent
  • The U.K.'s central bank maintains stock levels of government bonds and corporate bonds at £435 billion and £10 billion, respectively
  • The Monetary Policy Committee says a hike could be expected in the "coming months"
Bank of England MPC votes 7-2 to hold rates
Bank of England MPC votes 7-2 to hold rates

The Bank of England held interest rates steady Thursday but said that a hike is likely to be needed in the "coming months."

The Monetary Policy Committee (MPC) voted by a majority of 7-2 to keep rates at a record low 0.25 percent but noted that a strengthening economy and inflationary pressures could prompt them to shift their policy stance sooner than anticipated.

Meantime, the committee agreed to maintain stock levels of government bonds at £435 billion ($574 billion) and corporate bonds at £10 billion ($13 billion).

"A majority of MPC members judged that, if the economy continued to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure then … some withdrawal of monetary stimulus was likely to be appropriate over the coming month," the central bank said.

Mark Carney in London, Britain July 5, 2016.
Dylan Martinez | Reuters

The freeze in interest rates was largely anticipated by markets, however, the shift in language caused sterling to jump higher as investors sensed a more hawkish approach.

Sterling rose to $1.3317 against the dollar shortly after the announcement. It traded at 0.8923 against the euro.

The central bank said at its August meeting that it expects two interest rate hikes over the next three years, one more than previously estimated. However, Governor Mark Carney and his fellow rate-setters said at the time that this was likely to take place in the third quarter of 2018.

Thursday's announcement suggests that a hike will come far sooner than that in response to higher inflation.

BOE: Slack being absorbed faster than expected
BOE: Slack being absorbed faster than expected

"Coming months is not what the market had priced before this meeting if November is truly on the cards, but with 9bps (basis points) for November and 21bps for February the market was not completely ignoring the risk in recent sessions," Jordan Rochester, currency strategist at Nomura, said in a note to investors.

"The BOE have been upping the rhetoric and this was one of the final hurdles in their communication steps, but it does not mean November is guaranteed. What it will do is shift the emphasis on market economists who have very few hikes in their forecast over the next two years and that could further support the market too."

New figures released Tuesday showed inflation rose in August to 2.9 percent, well above the Bank of England's 2 percent target. The Bank of England said in August it expects inflation to rise to 3 percent in October before moving lower.

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