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MPC minutes: Carney gives strong hint rates will rise this year

by David Campbell on Jun 18, 2014 at 10:33

MPC minutes: Carney gives strong hint rates will rise this year

The Bank of England has said it is surprised at the relatively low likelihood of a 2014 rate rise priced into the market but rowed back from some more hawkish recent statements.

The minutes of the BoE’s Monetary Policy Committee 4/5 June meeting said that option pricing suggested a 15% chance of a rate rise by the end of the year

This ‘relatively low probability attached to a bank rate increase this year implied by some financial market prices was somewhat surprising,’ committee members said, in language similar to that used by governor Mark Carney in a speech delivered at Mansion House last week.

Overall however, the minutes offered a more dovish tone. Sterling slid sharply following the release, falling from a day high of $1.697 to $1.693, a week low.

The FTSE 100 added to earlier gains to rise 0.41% on the day, to 6,793. Benchmark 10-year Gilt yields fell from 2.789% to 2.736%.

Short term interest rates moved to discount the previously expected upward slope of interest rates, although option pricing continued to reflect more than 0.5% of tightening over 12 months.

The vote on rate movements and asset purchases remained unanimous to hold. ‘For some members, the policy decision had become more balanced in the past couple of months than earlier in the year… [but] in the absence of other inflationary pressures, it would be necessary to see more evidence of slack being absorbed,’ said the statement. 

‘The risk of 2014 hike is clearly growing,’ said Capital Economics’ UK economist Samuel Tombs.

‘For now, we still think that further downside surprises on inflation and some cooling down of the housing market will delay a rate hike until early 2015 and mean that any increase when it comes will be gradual.'

Saxo Capital Markets senior market economist Nick Beecroft said that after throwing cold water on rate rise talk for much of his first year with Carney at the helm, the minutes supplied more evidence that ‘the supertanker is slowly turning’.

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