LONDON (Reuters) - The pound rebounded against the dollar and the euro on Thursday after the Bank of England kept interest rates on hold but a vote for a hike by its chief economist heightened expectations that it could tighten policy at its next meeting in August.
Investors had been pessimistic about the chances of the British central bank offering strong guidance about a rate hike in the near future because of uncertainty over Brexit and the state of the economy.
But the BoE’s Monetary Policy Committee voted 6-3 to keep rates at 0.5 percent, with chief economist Andy Haldane unexpectedly joining those calling for rates to rise to 0.75 percent, citing concerns that recent pay deals could push wages up faster than expected.
The pound rose off a seven-month low to hit as much as $1.3256, from $1.3139 before the announcement, settling up 0.7 percent on the day. That briefly put the British currency on course for its biggest one-day rise since mid-April.
The British currency also strengthened versus the euro, rising 0.6 percent to 87.26 pence, a four-day high. while against the yen it firmed 0.5 percent to around 146.
(GRAPHIC: Sterling set for biggest daily rise since mid-April - reut.rs/2K3uTj2)
Markets now see a 45 percent likelihood of the MPC raising interest rates in August by 25 basis points and a 95 percent chance of one more rate hike by the end of 2018.
Markets had priced in a 38 percent chance of an August hike before Thursday’s vote and will probably want to see a run of decent economic data before raising August expectations much further.
After the vote, short-dated British government bond prices rose sharply while Britain’s top share index turned negative.
Some analysts said tentative signs of economic recovery had prompted the central bank to offer stronger guidance on rates.
“The message is clear: the BoE is not shifting off a normalisation path so don’t get too bearish on the pound,” said Stephen Gallo, European Head of FX Strategy at BMO Financial Group.
“Confidence about a growth rebound is widespread and there is a lot of confidence on rising price pressures and the labour market. August is live for a hike,” he added.
But other market watchers said lingering uncertainty over the economy and Brexit could still deter the BoE.
“Despite today’s vote 2019 is looking like the sensible choice to raise rates,” said Hamish Muress, a currency analyst at OFX.
The hawkish vote and sterling’s bounce sent Britain’s FTSE index down 0.6 percent while two-year British government bond yields rose to the highest since June 12.
Markets had clearly been “unprepared” for Thursday’s BoE vote, State Street Global Advisors said.
“The MPC (Monetary Policy Committee) appears to want to send a signal that markets should not be complacent over the pace of tightening and their desire to start normalising UK monetary policy,” Michael Metcalfe, SSGA’s global head of macro strategy, said.
Aside from monetary policy, Britain’s expected departure from the European Union in March 2019 continues to weigh on sterling.
Prime Minister Theresa May won a crucial Brexit vote in parliament on Wednesday, averting a rebellion that could have undermined her authority, and briefly boosting the pound.
But traders remain divided as to whether May’s victory will raise her chances of securing a more favourable Brexit deal with the EU given that many more months of negotiations lie ahead.
Additional reporting by Tommy Wilkes, Andy Bruce and Danilo Masoni; Graphic by Sujata Rao; Editing by Mark Heinrich