UK central bank divided over whether to raise interest rates

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Ben Brettell, senior economist at Hargreaves Lansdown is amongst the slew of analysts surprised by the Bank of England's tone this morning.

Volatility has been a theme this week, with USD/GBP fluctuating between lows of 0.7805 and highs of 0.7910 since Monday. Officials had previously said they were prepared to tolerate a burst of rapid price-growth to keep the economy on an even keel as the United Kingdom began exit talks with the European Union.

City experts were not expecting a change in policy today but were keen to read the Bank's views on the economy as inflation hit 2.9% this month.

However, the final results were worse than expected.

This came after the US Federal Reserve raised its benchmark rate last night, and flagged it was going to start reducing its balance sheet.

The Fed reassured markets slightly during Wednesday's policy decision.

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"CPI inflation has been pushed above the 2.0-percent target by the impact of last year's sterling depreciation", the BoE added in its statement on Thursday.

The Bank is facing a hard balancing act as it weighs up the needs of an economy weighed down by uncertainty around the Brexit negotiations, with rising inflation hitting consumers. This has limited United States dollars strength.

The central bank's Monetary Policy Committee voted five to three to keep the key bank rate unchanged. The next possible resistance for the pound is seen around the 0.86 region.

The New Zealand dollar declined against the pound after the Bank of England policy committee kept rates on hold but with a split vote, while it fell against the United States dollar in the wake of yesterday Federal Reserve statement ...

Despite Sterling's brief leap, it drifted lower against the Euro yesterday as traders sold GBP in reaction to the news that British wage growth figures had shrunk.

"Indeed the central bank has itself highlighted weaker consumer spending as a key risk to the United Kingdom economy, so now this particular chicken is coming home to roost, it's odd that the BoE is thinking about releasing the foxes".

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Disappointing UK retail sales also took their toll, with data from the Office for the National Statistics showing sales shrank much more than expected in May.

But it said there were "arguments in favour of leaving the policy rate unchanged". The Monetary Policy Committee of the Central Bank of Iceland made a decision to cut the rate on seven-day term deposits to 4.50% from 4.75%.

Friday's USA data includes the publication of Michigan's June consumer sentiment survey, as well as United States building permits and housing starts from May.

Stuart Edwards, bond fund manager at Invesco Perpetual, said politics were bearing down on bond markets as investors reassessed the risk of lending to the United Kingdom government with higher inflation and a looser budget looking likely.

Britain's Prime Minister Theresa May leaves after a meeting with the Leader of Northern Ireland's Democratic Unionist Party (DUP) Arlene Foster at 10 Downing Street after the general election in London, Tuesday, June 13, 2017. Investors remain concerned about how the new smaller government will handle the Brexit process. We'll also get plenty of numbers from the United States this afternoon including jobless claims, Philly Fed manufacturing index and industrial production.

Britain's data next week includes public sector net borrowing from May, as well as BBA's May mortgage approvals report.

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