Pound wobbles as Bank of England sees inflation reaching 4% at end of the year

The pound shook Thursday after the Bank of England left its rates and quantitative easing plan unchanged as the central bank raised its UK gross domestic product and inflation forecast.

The 7-to-1 vote for leaving its QE program unchanged at £ 875 billion for government bonds came when Michael Saunders was expected to call for a cut to £ 830 billion. There has been some speculation based on recent comments that Dave Ramsden would join Saunders in calling for a cut, but in the end he agreed with the committee.

The pound
GBPUSD, + 0.29%
rose as high as $ 1.3946 from $ 1.3890 on Wednesday following the BoE ruling, before falling back to $ 1.3915 levels. The Bank of England raised its GDP forecast for 2022 by a quarter point in both 2022 and 2023, raised its CPI forecast to 2.5% from 2% in 2022, and said a moderate tightening of monetary policy was likely over the forecast period is necessary.

The central bank said inflation will climb to 4% in the fourth quarter – a level Saunders feared could raise medium-term inflation expectations. In June the 12-month inflation rate was 2.5%.

Vivek Paul, UK chief investment strategist at BlackRock Investment Institute, noted that the central bank now believes it can stop reinvesting the proceeds of bonds if the key rate hits 0.5% instead of 1.5% – a more gradual tightening of the upcoming Politics implies.

The FTSE 100
UKX, -0.16%
was traded lower on Thursday, hurt by the losses of heavyweight miner Rio Tinto
RIO, -3.70%,
AAL, -2.98%
and BHP group
BHP, -2.85%.

Rolls Royce
RR, + 3.67%
rose nearly 4% as the engine maker said it was on track to meet its goal of making free cash flow positive in the second half of the year. It rose to an underlying operating profit of £ 307 million in the first half.

Rolls-Royce separately said late Wednesday that it is negotiating with Bain Capital to sell its Spanish business, ITP Aero. The Spanish newspaper Expansion reported that the deal price could be 1.6 billion euros.

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