BoE's Pill says he opposed bigger hike to avoid 'foot to floor' signal

Bank of England Chief Economist Huw Pill said on Friday he had opposed a 50 basis-point increase in Bank Rate this week because he did not want investors to think the central bank was going flat out to raise borrowing costs.

In a surprise split decision on Thursday, four of the nine Monetary Policy Committee members wanted to raise rates to 0.75% in what would have been the biggest increase in borrowing costs since the BoE became operationally independent 25 years ago.

A slim majority, including Governor Andrew Bailey and Pill, voted for a 0.25 percentage point increase.

Speaking at an online briefing to explain the BoE's new forecasts, Pill said he did not want to give the impression that the central bank was going "foot to the floor" in tightening policy and he favoured a nuanced approach instead.

Deputy Governor Ben Broadbent, speaking at the same briefing, said he too voted to raise interest rates by only 25 basis points because he did not want to cause big shifts in Britain's yield curve.

Minutes from the BoE's February meeting showed those in the majority were concerned that a bigger rate hike would have an "outsized impact" on market expectations that were already enough to push inflation below target in three years' time.

The minority who wanted a 50 basis point hike wanted to prevent high inflation becoming embedded in pay negotiations and expectations for future inflection, the minutes showed.

Financial markets have stepped up their already-high expectations for BoE tightening this year following the minority vote. Rate futures now price in Bank Rate reaching 1.75% by the end of this year, compared with just under 1.5% before Thursday's policy announcement. (BOEWATCH)

Two-year gilt yields (GB2YT=RR) - the bonds most sensitive to BoE rate expectations - have surged by 20 basis points since the announcement to their highest since April 2011 in their sharpest two-day jump higher since November 2015.

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