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Economy

Bank of England keeps U.K. interest rates at 0.5%, but managers expect an increase in May

A British Union Flag above the Bank of England

The Bank of England's monetary policy committee announced Wednesday that it had kept U.K. interest rates at 0.5%, with money managers expecting an increase in May.

The committee on Tuesday​ voted 7-2 to maintain the bank rate at 0.5%, and voted unanimously to leave the bank's corporate bond and U.K. government bond purchases program unchanged.

While the decision to keep interest rates unchanged was expected, the two minority votes to raise rates were highlighted by money managers as a sign of a likely hike at the May meeting.

"The fact that two out of nine MPC members dissented in the favor of a hike today, suggest that policy stance is tilted toward a tightening," said Charles St-Arnaud, senior investment strategist at Lombard Odier Investment Managers, in a statement. "It is very likely that some of the other members are just waiting for the May forecast to confirm the positive outlook to support a rate rise. … We believe that today's decision opens the door wide to a 25 (basis points) rise at the May meeting and think that the BoE will hike again later this year, likely at the October meeting," Mr. St-Arnaud said.

AXA Investment Managers also expects a 0.25 basis points increase in May, revised from a previous forecast of a hike in August, and a follow-up hike in November bringing interest rates to 1%.

David Page, senior economist at AXA IM, said in a statement that financial markets, which had broadly priced in a May increase, somewhat strengthened after the announcement, with two-year and 10-year gilt yields falling 2 basis points and 4 basis points, respectively, to 0.91% and 1.46%. The pound sterling fell against the euro by 0.2% and by 0.3% against the dollar following the announcement.