UK central bank divided over whether to raise interest rates

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The pound rose after the BOE kept its key rate unchanged at 0.25 percent as expected but it emerged that as many as three policy committee members had voted to raise interest rates.

Although Kristin Forbes voted for a hike, she is leaving the MPC but the shift to a more hawkish stance from Ian McCafferty and Michael Saunders is a new development.

The pound erased its losses after the decision. Bonds fell, with the 10-year gilt yield rising 9 basis points to 1.02 percent.

The unexpectedly tight 5-3 vote adds questions over monetary policy to uncertainty over Britain's political outlook since Prime Minister Theresa May failed to win a parliamentary majority in an election last week.

Due to election campaigning, Hammond has not yet announced a replacement for US academic Forbes - whose three-year term at the BoE expires at the end of the month - or for Charlotte Hogg, who has left the central bank after lawmakers criticized her failure to declare potential conflicts of interest.

Citing the pound's recent decline, the BoE said inflation could overshoot the 2 percent target by more than previously thought. The unemployment rate is 4.6 percent.

"The prospect of higher returns on cash is giving sterling a lift against the dollar (to almost $1.2750) and euro (€1.1390), especially as markets had previously thought the Bank of England would only look to increase interest rates from their record-low levels after Brexit in 2019". However, most of the MPC opted to leave rates frozen at their lowest levels due to widespread uncertainties. In the previous two MPC meetings only Forbes had voted for an increase.


In the policy summary, there were comments that the continued growth of employment could indicate that spare capacity in the economy is being eroded, lessening the trade-off that the MPC needs to balance and reducing the MPC's tolerance of above-target inflation.

The UK 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. "A slowdown in household consumption, and GDP as a whole, had recently begun, and it was too early to judge with confidence how large and persistent it would prove to be", the minutes said.

The Bank of England on Thursday froze interest rates at a record low 0.25 percent, but three policymakers called for a hike on Brexit-linked fears over soaring consumer prices. Now the economy was slowing, the central bank had little room for manoeuvre with rates so low, he said.

All committee members agreed that any rate rises would be expected to be at a gradual pace and "to a limited extent".

Today's Bank of England (BoE) interest rate decision is likely to be the main cause of GBP/EUR exchange rate movement.

Carney and Treasury Chief Philip Hammond were due to speak at a high-profile, annual dinner at Mansion House in London on Thursday night, but the event was canceled after the deadly fire (http://www.marketwatch.com/story/speeches-by-uk-financial-officials-canceled-after-fire-2017-06-15) in an apartment block in the city on Wednesday. The BOE said in May that its economic forecasts assumed that Britain's adjustment to a new relationship with the European Union will be "smooth", avoiding a so-called cliff edge.

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