BoE leaves interest rates on hold, August hike seen

The Bank of England kept interest rates at 4.5 percent on Thursday, in line with market expectations, but most economists believe a hike is now likely next month as the Bank seeks to pre-empt rising inflation.
An August move would be in line with the Monetary Policy Committee's (MPC) strategy of gradually raising borrowing costs as the economy gathers steam, while housing prices and consumer borrowing continue booming.
"After hiking in both May and June a third consecutive month would have looked over-aggressive. No doubt the MPC felt that it was time to pause and gauge the impact of the hikes already made," said Jonathan Loynes, economist at Capital Economics.
Since November the MPC has raised rates four times from 3.5 percent at quarter percentage point increments.
Financial markets barely reacted to the decision, which had been predicted by 45 out of 46 economists polled by Reuters last week. Nearly all of them saw the next rise being a quarter percentage point in August, if there was no move on Thursday.
The BoE did not issue a statement explaining its decision after the MPC ended its monthly rate-setting meeting. Normally statements accompany only rate changes. Forecasters had taken their cue from MPC members who had restated the BoE's commitment to a gradual approach to monetary tightening several times in recent weeks.
Their comments were probably prompted by speculation that the MPC had dropped the policy after the back-to-back rate rises in May and June. Rises in November, February and May led many analysts to expect hikes only at three-month intervals.
Industry and trades union groups welcomed the BoE's decision, while accepting rates were on the way up.
The BoE has signalled it sees little spare capacity in the economy and a tightening labour market which will lead to inflationary pressures needing to be tackled by interest rate rises.
Evidence has grown in the past month that the economy is growing briskly, yet the BoE's decision not to raise rates also follows signs of cooling in some sectors.
The consumer confidence index fell in June, first quarter household consumption growth was revised down last week and surveys have said house price inflation is slowing.
Meanwhile, annual inflation at 1.5 percent in May was well below the Bank's two percent target, although this was the highest rate so far this year.
Economists also point out that interest rate changes can take up to a year to feed through into the economy, so the BoE may have thought it best to give itself more time to see how its four most recent hikes are taking effect. The minutes of the MPC meeting will be released on July 21.