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Pound sterling holds gains against the dollar and euro after the Bank of England maintains interest rates and signals it remains guarded against rising inflation.
The Bank's Monetary Policy Committee (MPC) voted by a majority of 8–1 to maintain Bank Rate at 3.75%. One member voted to increase Bank Rate by 0.25 basis points.
"For now, the softer real economy makes it appropriate to maintain Bank Rate," said Governor Andrew Bailey as he accounted for his decision to hold rates.
The currency market reaction suggests that a 'dovish' outcome, that would have sunk sterling, has been avoided: The pound-euro exchange rate trades towards the top of the day's range at 1.1545.
Pound-dollar rose to 1.5330 in the minutes leading to the decision and holds the advance in the aftermath.
Forward-looking money markets showed investors entered the decision expecting the Bank will raise rates at least three times this year.
This meant the risk was that the Bank pushed back against this expectation, delivering a 'dovish' message.
However, the communications from the Bank show a number of MPC members say they stand ready to raise interest rates if the data points to rising inflation dynamics beyond energy and food.
"There is a risk of material second-round effects in price and wage-setting, which policy would need to lean against," said the statement.
For the British pound, that's probably enough to keep alive the expectation that rate hikes are coming down the line.
By raising rates, the Bank would be able to nip any such unwanted developments in the bud.
"As someone already concerned about a stalling of the underlying disinflation process even before the latest energy price shock, a prompt but modest hike in Bank Rate will help mitigate upside risks to price stability stemming from a re-emergence of intrinsic inflation persistence," said Huw Pill, the Bank's Chief Economist, who voted to raise interest rates today.
However, it's clear the majority of MPC members think it's still too early to act as they note the economy entered the Middle East crisis on a weak footing, meaning it simply doesn't have the stamina to sustain another pickup in inflation.
When energy prices spiked in 2022 after Russia's invasion of Ukraine, households were flush with cash saved during the pandemic, interest rates had been cut to record lows and the jobs market was so healthy employees could demand higher wages or move jobs.
All that contributed to a snowballing in inflation. None of these conditions are present today.
The statement says, "the labour market continues to loosen, and a weakening economy could contain inflationary pressures."
It also says financial conditions have tightened - we have seen bond yields rise steadily - since the conflict began, which will help to reduce inflation over time.
That means the Bank thinks conditions in the economy have already done some of the work that raising rates would have achieved.
Nevertheless, the steady pound and short-term bond yields that follow the decision suggests traders think the Bank won't be able to ignore incoming inflationary pressures, and that it will ultimately have to raise rates.