BoE hints at rate rise sooner than market expects

Sterling moved higher on Wednesday as minutes of the Bank of England's rate-setting meeting contained a hint that rate rises may come sooner than the market expects.

Members of the Monetary Policy Committee again voted 9-0 to hold interest rates at their record low in April but for two members the decision was "finely balanced". This indicates it may not be long before Martin Weale and Ian McCafferty, who previously voted for rises, conclude it is time again to start tightening policy.

There was no mention in the minutes of the possibility of any loosening of monetary policy. Traders took this as a signal the committee was moving unanimously towards the next move in rates being up even though Andy Haldane, the BoE's chief economist, suggested in a recent speech that more loosening could be on the cards.

Sterling reached a day high of $1.5013 after the release of the minutes, rising 0.6 per cent on the session from $1.4931 immediately beforehand.

Analysts also jumped on a remark in the minutes that the market yield curve, which is pricing in about two quarter-point rises over the next two years, is "exceptionally flat".

Simon Wells, chief UK economist at HSBC, said that while the MPC has been keen to stress that any raises will be gradual and limited it may be worried that markets are not assigning a large enough probability to rates rising more quickly.

"The May inflation report could be the point at which it chooses to send a warning," he added.

The minutes also record cautious optimism about the prospects for eurozone growth, pointing to a "succession of firmer data" that if sustained would benefit the UK economy.

Alan Clarke, economist at Scotiabank, said the tone of the minutes suggests the MPC is "taking baby steps in the hawkish direction". "Overall, the only way is up for interest rates - but not yet," he added.

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While the MPC still expects UK inflation to dip into negative territory over the coming months, in general members seemed more confident that low inflation would not become ingrained.

The minutes note that it is "unlikely that activity growth could be maintained at its current pace for long, without generating greater inflation in wages and prices, in the absence of some material improvement in labour productivity".

They also suggest the sterling appreciation could be feeding through "more quickly" into CPI than expected, meaning that the drag on inflation from the stronger currency could also be exhausted more rapidly than anticipated, resulting in a faster pick-up in inflation.

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