BoE sees inflation peaking nearer 3%, 'stark divide' emerges despite 6-3 vote

Last week’s Bank of England meeting ended on a considerably more dovish note than the 6-3 vote for keeping rates unchanged suggests. The communications accompanying the decision imply that significant inflation surprises will be needed to move any further votes to the hike column.

The MPC pointed to clear signs of disinflation and little evidence so far of second-round effects, while the inflation forecast was actually trimmed to show a peak of closer to 3% later in the year.

This mismatch between the vote and rhetoric is unusual and, in our minds, points squarely to a stark divide between the hawks and the doves on the committee.

The hawks will argue that the spike in energy prices warrants insurance tightening, though that argument only really holds if the shock threatens to feed into underlying inflation, and it doesn't appear as though the majority of the committee believes it will.

Our view remains in favour of no change in rates this year, and even markets are beginning to rethink. This dovish shift was, however, swamped by the news from the Federal Reserve the day before, so sterling stabilised against the euro and managed a significant rally against the dollar.