The Bank of England voted unanimously earlier this month to hold the benchmark interest rate at 0.50%

The Bank of England voted unanimously earlier this month to hold the benchmark interest rate at 0.50% and to maintain its GBP 175B asset purchase program as policy makers held an enhanced outlook for the economy. The BOE minutes said “inflation would probably be higher in the short-term than the committee had thought a month ago,” while the rebound in economic confidence paired with the improved outlook for asset prices “could mark the start of a virtuous upward spiral for the economy.” However, the board held a caution tone and warned that there could be “false dawns” as the economy has yet to reach “the point where the level of spare capacity was shrinking,” and went onto say that “a larger asset-purchase program could still be justified” to encourage a sustainable recovery. At the same time, policy makers noted price growth is likely to be “extremely volatile” over the coming months as the board anticipates an upward revision in the 2Q GDP reading, and the comments suggests the central bank will maintain a neutral policy stance going forward as the outlook for growth and inflation improve.Minutes from this month’s Bank of England monetary policy meeting headline the economic calendar in European hours. The announcement itself produced no surprises with interest rates left at 0.5% and the magnitude of quantitative easing unchanged at 175 billion pounds. Just five days later, however, BOE chief Mervyn King gave resoundingly dovish testimony to House of Commons Treasury Committee, saying poor credit growth remains a direct drag on demand and revealing that policymakers are considering cutting the interest rate they pay on bank deposits to encourage idle reserves to be channeled into lending. The latter comment in particular sent the British Pound tumbling, with traders clearly caught off guard as the BOE was seemingly preparing for more, not less, monetary easing despite the recent uptick in leading economic indicators. This creates strong potential for sterling volatility as the markets dissect tonight’s release for any clues on how serious King and company are about the deposit rate idea and when (if ever) such an outcome may be expected.