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Pound yo-yos after monetary policy surprise

The pound spiked Thursday after a number of members of the Bank of England's monetary policy committee unexpectedly supported an interest rate hike.

[LONDON] The pound spiked Thursday after a number of members of the Bank of England's monetary policy committee unexpectedly supported an interest rate hike.

While the BOE, as widely expected, kept its interest rates at a record low 0.25 per cent, the vote was 5-3, which surprised markets and analysts as only one member had advocated a rate hike at the previous meeting.

The pound, which had slid under US$1.27 before the decision was announced, shot up to US$1.2795. It later gave up much of those gains.

"Today's unexpected split has certainly caught the markets by surprise," said market analyst Michael Hewson at CMC Markets, given concerns about a slowdown in the economy and consumers becoming increasingly stretched.

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Weak retail sales data released early Thursday added to concerns that the British economy was starting to feel the effects of Brexit.

'Tactical move?

Mr Hewson suggested "there could be another way of looking at this vote... this could well be a tactical move by the MPC to keep the markets off balance, as well as helping support the pound and attempt to keep a lid on inflation..."

The BOE forecast inflation would surge further above its 2 per cent target in the coming months. The fall in the value of the pound after the Brexit vote last year has fuelled consumer price rises.

However, Kallum Pickering, senior UK Economist at Berenberg Bank, said that "despite elevated political and economic uncertainty, the Bank of England seems to be heading for a first rate hike soon."

European equities, which were already down as investors reacted to the Federal Reserve's outlook on US interest rates and a slump for oil prices overnight, ended the day with losses.

London's FTSE 100 shed 0.7 per cent, Frankfurt dropped 0.9 per cent and Paris gave up 0.5 per cent.

On Wall Street, the Dow as down 0.2 per cent approaching midday.

"US stocks are moving lower in early-morning action as traders have had some time to digest yesterday's policy decision from the Fed to raise its target range for the fed funds rate," said analysts at Charles Schwab.

Fed mopping up

On Wednesday, the Federal Reserve raised its benchmark interest rate by a quarter point to one to 1.25 per cent and said it expected to lift borrowing costs for a third time this year, brushing aside weaker inflation and consumption data in recent weeks.

It also laid out its plans to begin mopping up some of the easy money it had injected into markets.

"The Fed was unequivocally hawkish," said AxiTrader chief market strategist Greg McKenna.

Traders were spooked also by a report that US President Donald Trump was being investigated for possible obstruction of justice, analysts said.

Mr Trump took to Twitter Thursday to blast media reports that the counsel overseeing the probe into Russia's alleged meddling in the US election is looking at whether the US president tried to obstruct justice.

"They made up a phony collusion with the Russians story, found zero proof, so now they go for obstruction of justice on the phony story. Nice," the president wrote on Twitter.

Special prosecutor Robert Mueller is looking into allegations of collusion between Mr Trump's campaign and Russia to sway the outcome of last year's presidential election, with the Washington Post reporting top intelligence officials would be questioned over allegations Mr Trump tried to get the FBI to back away from a probe into former national security adviser Michael Flynn.

Mr Mueller has the authority to investigate whether Mr Trump tried to obstruct justice which is a potentially impeachable offence.

The report added to concerns the tycoon's planned big-spending, tax-cutting, deregulating agenda - which helped fuel a months-long global shares rally from November - could flounder.