The Monetary Policy Committee voted 8-1 to leave rates unchanged, but will continue monitoring the situation to determine if the economy requires stimulation to ride out any impact that Brexit might have.
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Officials noted myriad signs that the economy is slowing amid the uncertainty triggered by the Brexit vote but said they chose to wait until August – when they will have more data and better insights into the economy’s health – to implement new support measures. However, it did signal that it could cut rates at its meeting in early August after receiving additional data on how the economy is faring in the wake of the June 23 referendum.
The decision was a surprise – most economists had expected the central bank to cut its main interest rate from the record low of 0.5 percent to shore up the economy.
The FTSE 250 Index of midcaps with more domestic exposure rose 0.5 percent today, while Ireland’s ISEQ Index fell 0.3 percent.
“Early indications from surveys and from contacts of the Bank’s Agents suggest that some businesses are beginning to delay investment projects and postpone recruitment decisions”. The nine-member panel did hint it will loosen policy in August when it will have fresh forecasts about the state of the British economy. They said activity in the United Kingdom housing market looks set to weaken significantly.
The pound jumped 2 cents against the dollar to $1.334 and rose 1.5c to €1.20. “The precise size and nature of any stimulatory measures will be determined during the August forecast and Inflation Report”. But the quicker-than- expected appointment on Wednesday of Mrs Theresa May as Britain’s new Prime Minister helped calm nerves. One of her first acts was to appoint Philip Hammond as the country’s new Treasury chief.
Etsuro Honda, Japan’s ambassador to Switzerland told The Wall Street Journal that more fiscal and monetary stimulus was needed for Japan, reports Market Watch.
The BoE’s decision did not reflect any official change of view over the damaging short-term economic consequences of leaving the European Union but surprised financial markets where expectations had risen that the bank would take action immediately.
“The committee discussed various easing options and combinations thereof”, the bank said in a statement.
But they said these factors could prove temporary and improve over the coming weeks as the fog of the recent Brexit vote turmoil began to clear. However, there are preliminary signs that the result has affected the mood among households and companies, with sharp falls in some measures of business and consumer confidence.
“While the ECB will not act directly just because the Bank of England has done something, any change in growth outlook in Britain is very likely to also impact growth in Europe, which will be followed very closely by the ECB”, said Michiel de Bruin, head of global rates at BMO Global Asset Management.
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But others say that the decision to hold off might only compound the confusion. He’s also said they could shorten the horizon over which they wanted to return inflation to target, creating the expectation of more aggressive action.
