Sterling popped on Thursday (March 16th) after a hawkish surprise from the Bank of England. The MPC was not unanimous in its decision to keep rates hold, with Kristin Forbes voting for a 25 basis point hike. That meant the MPC voted 8-1 to keep rates at 0.25%, while the asset purchase purchase was also left alone.

Forbes is a noted hawk and leaves in June, but it wasn’t just her dissenting voice that struck home. The minutes paint a picture of a committee moving a lot closer to hiking rates than markets had realised.

This part of the minutes is vital:

“…some members noted that it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted.”

The fact that some members of the MPC may be inclined to agree with Forbes suggests a hawkish tilt that few were expecting.

After all the talk of a hawkish surprise from the Fed it was the Bank of England that took markets off guard. This was expected to be a dud of a meeting. Cable jumped to its strongest since the start of March and is up 0.5% for the day, a good two cents clear of this week’s lows. The rise in sterling, and (relative) hawkishness of the MPC sent the FTSE lower and it’s handed back a lot of today’s gains.

Forbes’s view is that inflation is rising quickly and will be above target for three years or more. Moreover the UK economy remains resilient. For her this is enough to raise rates back to 0.5%.

Others on the MPC don’t agree. Aggregate demand is expected to slow and consumer spending is precarious. The MPC would rather see inflation – driven by one-off factors like energy and the fall in sterling – overshoot than risk choking off growth when the UK is facing such a precarious position with regards to Brexit and negotiations with the EU.

The argument against hiking is the same as we see for the Fed and the ECB – while growth is solid and inflation rising, we are not yet seeing the kind of upward pressure on wages that is needed to sustain gains in the underlying or core inflation rate.

What we don’t really know is what the BoE judges as good enough growth in demand and wages to warrant tightening. It warns risks are in both directions – it does look rather like it’s a 50:50 bet on whether rates will rise or fall next. Although a cliff-edge Article 50 negotiation would surely see members step back from thoughts of hiking. The danger is growth picks up in the next few months and wages rises as the unemployment rate is so low, making the Bank raise rates prematurely.

On current projections it remains committed to ‘some modest withdrawal of monetary stimulus over the course of the forecast period’, but warned that a ‘more marked slowdown in activity than currently anticipated … could warrant additional policy support relative to that implied path’