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Aug. 5, 2021, 7:46 a.m. EDT

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

By Steve Goldstein

The pound wobbled Thursday after the Bank of England kept its kept interest rates and its quantitative easing plan unchanged, as the central bank boosted its U.K. gross domestic product and inflation forecast.

The 7-to-1 vote in favor of keeping its QE program unchanged at £875 billion for government bonds came as Michael Saunders, as expected, called for a reduction, to £830 billion. There was some speculation based on recent commentary that Dave Ramsden would join Saunders in calling for a reduction, but in the end, he voted with the committee.

The pound (XTUP:GBPUSD) did move higher after the BoE decision, to as much as $1.3946 from $1.3890 on Wednesday, before drifting back to the $1.3915 level. The Bank of England hiked its GDP forecast for 2022 by a quarter point in both 2022 and 2023, increased its CPI forecast to 2.5% from 2% in 2022, and said a modest tightening of monetary policy over the forecast period is likely to be necessary.

The central bank said inflation would jump to 4% in the fourth quarter — a level Saunders feared might cause medium-term inflation expectations to drift higher. In June, the 12-month rate of inflation was 2.5%.

Vivek Paul, UK chief investment strategist at the BlackRock Investment Institute, noted the central bank now believes that it can stop reinvesting the proceeds from bonds when the policy rate hits 0.5%, rather than 1.5% — implying a more gradual tightening policy ahead.

The FTSE 100 (FTSE:UK:UKX) was trading lower on Thursday, weighed down by losses for the heavyweight miners Rio Tinto (LON:UK:RIO) , Anglo American (LON:UK:AAL) and BHP Group (LON:UK:BHP) .

Rolls-Royce (LON:UK:RR) advanced nearly 4% as the engine maker said it’s on track to meet its target of turning free cash flow positive in the second half. It swung to an underlying first-half of operating profit of £307 million.

Rolls-Royce separately said late Wednesday that it was in talks with Bain Capital on the sale of its Spanish business ITP Aero. The Spanish newspaper Expansion reported the deal price might be €1.6 billion.

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