Gold touched a two-year high of $1,374.91 last week, after Britain voted to leave the European Union, as anxious investors started putting their cash into safe-haven assets.
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The surprise decision to keep rates on hold pushed sterling to a two-week high against the USA dollar of $1.3480 and British government bond yields rose.
The decision to hold rates comes despite intense speculation that the Bank would move to slash rates this month, with financial markets having priced in a cut to 0.25%.
The shock decision to exit the 28-member bloc led BoE chief Mark Carney to say “some monetary policy easing will likely be required over the summer”.
Commenting on the economic impact of the Brexit result prior to the Bank’s announcement, the new Chancellor of the Exchequer, Philip Hammond said that the economy had “taken a shock”, but that the United Kingdom remains “open to business”. Philip Hammond, one of Prime Minister Theresa May’s first appointments, offered calming tones of reassurance to the markets and the general public in a series of interviews after taking office.
The Bank of England kept interest rates unchanged at 0.5%.
The prospect of the United States raising interest rates soon has also faded and today Philadelphia Fed President Patrick Harker said if there any tightening would be “fairly shallow”.
Jeremy Stretch, an FX strategist at CIBC capital markets, has suggested there is pressure on the BOE to follow-through with Carney’s pledge to cut interest rates at his June 30 speech.
At the time, the governor also said he did not want to follow the European Central Bank’s and other central banks’ examples of bringing interest rates into negative territory, which would hurt British lenders.
Commenting, Darren Ruane, head of fixed interest at Investec Wealth & Investment, said: “It is likely that markets will comprehensively price in the likelihood of a rate reduction in August”.
‘Economic data is already coming in weak and we are going to see forceful action from the Bank of England in August.
It is too soon to see the effect of Brexit on economic activity since the referendum and the very likely softening of economic conditions in the United Kingdom over the coming months.
However the Bank’s Monetary Policy Committee has signalled most of its members expect monetary policy will be “loosened in August” failing a return to more normal economic conditions.
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The market has been recovering from a sharp, post-referendum sell-off partly on expectations of further stimulus from central banks; the FTSEurofirst index is down just 1.6 per cent since the vote.
