Bank of England holds but prepares markets for policy tightening

The Bank of England's interest rate setting committee elected on Thursday to keep its main rate on hold, but issued forward guidance that made it clear the next move on rates would be higher.

The Bank's Monetary Policy Committee held all its key policy settings, including the main overnight rate at 0.25% and its asset purchase facility at £435bn.

Voting remained 7-2 in favour of holding pat, as at the last MPC meeting in August, with the two votes cast in opposition calling for an immediate quarter-point rate hike. The two hawks were Ian McCafferty and Michael Saunders.

Forward guidance

In the minutes to the meeting – now published on the same day as the rate announcement – the Bank took a more hawkish tone than in previous meetings, suggesting "some withdrawal of monetary stimulus is likely to be appropriate over the coming months".

Mark Carney, BoE governor: Despite risks for the economic outlook, stimulus withdrawal may soon be appropriate - Source: BoE

The MPC conceded, however, that "considerable risks" to the economic outlook remained.

These included the response by households to higher inflation and low wage growth and the response by businesses and sterling to the process of withdrawal from the European Union.

Economists' reactions

Analysts in London had been expecting some communication of the Bank's intention to begin stimulus withdrawal in the coming months.

"This supports our long-held view that market expectations had gone way too far in expecting rates to remain on hold until 2019," said Paul Hollingsworth, UK economist at Capital Economics.

He added: "If the economy continues to hold up, and there are clearer signs that wage growth is building, then the first hike could come somewhat earlier than we had previously envisaged, possibly as soon as the next meeting in November."

Few shared this view, however, many believing the economy too fragile to withstand higher rates considering the impact on an indebted and already stretched consumer.

"It now remains to be seen whether the economy can sustain its limited momentum in the face of the threat of imminent rate rise," said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

"Rate hikes by the BoE at this point would be counterproductive as it could undermine economic activity at a time when both consumer and business confidence are already flagging," said Abi Oladimeji, chief investment officer at Thomas Miller Investment.

Market reaction

Bond yields rose – but not so much as to reflect the possibility of the beginning of a cycle of rate hikes. The yield on the two-year Gilt rose just 1 basis point to 0.3%, while the 10-year yield gained 1 basis point to 1.16%.

Sterling was boosted, however, gaining 0.8% against the dollar to $1.3316 and adding 0.9% to €1.1210 versus the euro.

Stock markets had already been subdued in morning trade and the FTSE 100 was 0.7% lower at 7,325.