The Bank of England kept interest rates unchanged at 0.5%.
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The Monetary Policy Committee voted by a majority of 8-1 to maintain the Bank Rate and voted unanimously to keep the stock of purchased assets financed by the issuance of central bank reserves at £375 billion.
“Although the Monetary Policy Committee (MPC) surprised many by remaining on hold, we still expect an easing of policy in the near future”, Bill Street, head of Investments EMEA at State Street Global Advisors, said in a note.
The Bank of England said it expects to see “sizeable falls” in the value of commercial property in the coming months and it has also revised down its outlook for house prices. Survey data shows business and consumer confidence have taken a severe knock – in July, GfK’s consumer sentiment index suffered its biggest monthly decline since 1994.
In the statement accompanying its decision, the rate-setting committee noted there were early indications that firms were delaying investment projects and postponing recruitment, and that the housing market has weakened.
The committee suggested that the decision on cutting interest rates had been deferred rather than rejected, signalling a likely easing in August.
The surprise decision to keep rates on hold pushed up sterling to a two-week high against the USA dollar of US$1.3480 and British government bond yields rose. Sterling has jumped after the policy stance and now trading at 1.334 per dollar.
“If there is a time for the MPC’s grandees to cut rates, it will be in August when they have the bank’s next Inflation Report in hand and a clearer picture of the impact of the Brexit vote on the United Kingdom economy”.
The BoE said it was likely to deliver stimulus in three weeks’ time, possibly as a “package of measures”, once it has assessed how the June 23 referendum decision has affected the economy, the world’s fifth largest.
One MPC member, Gertjan Vlieghe, dissented from the move to keep the BOE’s benchmark rate unchanged, expressing a preference preferring instead to cut it immediately and augment that effort with further stimulus in August, according to minutes of officials’ deliberations.
However, Angus Armstrong, director of macroeconomics at the National Institute of Economic and Social Research, was more critical: “The lack of clear direction is more likely to add to economic uncertainty and therefore be detrimental to demand and the economy”.
Others said the quicker-than-expected appointment of Theresa May as Britain’s new prime minister on Wednesday and the calming of financial markets had lessened the need for immediate action.
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In its monetary policy statement, the BoE recognised that financial markets had reacted sharply to the UK’s decision to exit the European Union with the sterling’s effective exchange rate falling 6% since the last MPC meeting. While the central bank said it discussed what measures it could use to help the economy, it stopped short of detailing what those might be.
