UK central bank surprises with split decision on rate hike

Interest rates stay at 0.25% but three at Bank urge rise amid inflation fears

The last time three MPC members voted for a rate rise was in 2011 - when there were nine members serving on the MPC - and the last time a single vote could have swung the decision on rates was in June 2007 when the committee split 5-4.

The three officials pushing the bank to act-Kristin Forbes, Ian McCafferty and Michael Saunders-said this inflation overshoot, plus signs there is less slack in the labor market, warranted an immediate rate hike.

As for the rest of the five MPC voters, their reasons for keeping policy unchanged were concerns of slowing consumer spending and economic growth, with some uncertainty as to how large and persistent the slowdown would be, while they pointed out that inflation is accelerating too quickly and it is expected that CPI would remain above the Bank's target for an extended period.

"A rate hike is the last thing the economy needs right now", said Samuel Tombs, economist at Pantheon Macroeconomics in London.

There was also the matter of the UK's hung parliament, after PM Theresa May's Tories performed far worse than expected at the ballot last week.

Britain's economy slowed sharply in the first quarter of this year as the effect of higher inflation caught up with consumers at a time of sluggish wage growth. And the UK's economic and political uncertainty on the eve of Brexit negotiations means "a compelling case can still be made for the Bank of England to hold off from any interest rate hikes-not just now but for some time to come", according to Howard Archer, chief economic advisor at EY's economic research unit, the EY ITEM Club.

City experts were not expecting a change in policy today but were keen to read the Bank's views on the economy as inflation hit 2.9% this month.

Attention is now turning to the future make-up of the MPC.

A replacement for Charlotte Hogg, who left the central bank after lawmakers criticised her failure to declare potential conflicts of interest, has also to be announced.

Hammond and Carney had been due to address an annual dinner for financiers in the City of London later on Thursday. Moreover, indicators of investment and exports looked upbeat, the BoE said "The continued growth of employment could suggest that spare capacity is being eroded, lessening the trade-off that the MPC is required to balance and, all else equal, reducing the MPC's tolerance of above-target inflation", the BoE said.

The BOE forecast inflation would surge further above its 2 per cent target in the coming months.

Prime Minister May is trying to get a commitment of support from Northern Ireland's main pro-United Kingdom party to allow her to pass legislation.

In August 2016, policymakers at the United Kingdom central bank voted unanimously to bring interest rates to a record low of 0.25%, amid fears of a disruptive economic fallout from the Brexit referendum.

Data from the Office for National Statistics showed that United Kingdom retail sales declined more than expected in May.

"The squeeze on the United Kingdom consumer from weak real wages will only filter through slowly but it is coming", Societe Generale strategist Kit Juckes said before the report's release.

On specific stocks, DFS furniture warned full-year earnings would be below market expectations due to a weakened trading environment, hurting its shares and those of Next, Kingfisher, Marks & Spencer, Tesco.

A strong jobs report boosted the Australian dollar overnight, as stronger gains in employment - boosted entirely by full time roles - brought the unemployment rate back to a four year low, while participation rose to its highest in nearly a year.

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