Bank of England keeps rates on hold, hints at May rise

The Bank of England kept its interest rates unchanged Thursday, but appeared to hint that another rate hike in May was possible as inflation remains high.

The minutes to the meeting showed that two of the nine members on the Monetary Policy Committee backed an immediate quarter-point increase in the bank's main interest rate to 0.75 per cent. The other seven, including Governor Mark Carney, preferred to keep it unchanged at 0.5 per cent.

Ian McCafferty and Michael Saunders argued that a "modest tightening ... could mitigate the risks from a more sustained period of above-target inflation that might necessitate a more abrupt change in policy and hence a greater adjustment in growth and employment".

Despite resisting an immediate hike, a majority in the committee is ready to back another interest rate increase soon, the minutes indicated. In November, the bank raised rates for the first time in a decade to clamp down on high inflation even though higher borrowing rates have the potential to weigh on the economy, which had already slowed in the face of uncertainty related to the exit from the European Union.

As in February, the minutes showed that the "best collective judgement" of the rate-setting panel was that "an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a more conventional horizon".

Rate-setters also said future increases were likely to be "gradual" and "limited."

In financial markets, investors have price in 80 per cent of another rate rise and Thursday's minutes did nothing to alter that view. The recently resurgent pound remained firm, trading 0.1 per cent higher after the rate decision at $1.4150.

"It now looks increasingly likely we'll see a rise to 0.75 per cent at the bank's May meeting," said Ben Brettell, senior economist at stockbrokers Hargreaves Lansdown. "Beyond that the outlook is less clear."

In February, when the bank published its quarterly economic projections, Carney indicated that a hike in May was likely. Economic figures since then, according to Thursday's minutes, were "broadly consistent" with those views.

Official figures this week showed inflation in the year to February fell to an annual rate of 2.7 per cent, though that's still above the bank's target of two per cent. In its February projections, the Bank of England said it expects inflation to remain above target for another year or two, supporting predictions for at least one more rate hike this year.

- AP