Hawkish BoE sends sterling back above USD1.34

The Bank of England's latest decision had a hawkish slant, supporting the pound, while some recent comments from US policymakers kept a lid on the dollar.

The dollar was largely lower across the board, but did advance against the franc, amid deteriorating US and Swiss trade relations.

Sterling rose to USD1.3422 on Thursday afternoon UK time, from USD1.3326 on Wednesday. Against the euro, it climbed to EUR1.1650 from EUR1.1626.

A quarter point cut by the BoE on Thursday taking the bank rate to 4.00% from 4.25% was widely expected.

But the split among Monetary Policy Committee members proved surprising, requiring an unprecedented second round of voting.

Five members of the nine strong MPC, including BoE Governor Bailey, voted for the 25 basis points reduction. Bailey was joined by Sarah Breeden, Swati Dhingra, Dave Ramsden and Alan Taylor.

Four MPC members - Megan Greene, Clare Lombardelli, Catherine Mann and Huw Pill - voted to keep rates on hold.

The BoE said Taylor would have preferred to reduce bank rate by a heftier 50 basis points but in a second round of voting eventually backed the quarter point cut.

XTB analyst Kathleen Brooks commented: "The pound has surged this afternoon, after the Bank voted to cut interest rates, as expected, however, the vote was on a knife edge. The tight vote split, with 5 members voting for a cut, while 4 members voted to remain on hold, is the most noteworthy part of today's decision. The governor said that the decision was finely balanced and the hawkish camp at the BOE seems to have gained a new member. Claire Lombardelli, who in the past was in the dovish camp, voted to keep rates on hold.

"The immediate aftermath of this meeting has seen a repricing of interest rate expectations for the UK. There is now less conviction that a second rate cut will come later this year. Currently there is 21 bps of cuts priced in by year end, which just shy of another cut. Looking ahead, interest rates are expected to be 3.5% in a year’s time, which is slightly higher than before the meeting."