Sterling forward interest rates, which had been pricing in a strong chance of a cut in the bank’s 0.5 percent base rate to zero by September, now only fully price in a single quarter-point cut. The domestically focused FTSE 250, which tracks mid-cap companies, gained to trade up 0.4 percent. Carney has already indicated that some sort of stimulus will be offered during the summer months as his pre-vote warnings about the impact on the economy had begun to crystallize. Bank of England governor Mark Carney made clear on a number of occasions in the press and on TV, as did the MPC in its May Inflation Report, and again in the minutes of its June meeting, that a vote to leave the European Union could have material implications for the outlook for United Kingdom output and inflation. “The precise size and nature of any stimulatory measures will be determined during the August forecast and Inflation Report round”, said the minutes.
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To an extent the Bank is guessing here, as there has been no hard economic data since the Brexit vote to indicate how bad any slowdown might be.
“Most members of the committee expect monetary policy to be loosened in August”, the bank said.
The U.K. now appears to be on a firmer political footing, with the new Prime Minister Theresa May taking office and appointing her cabinet today. Hours after his appointment, Hammond said the government would do whatever was necessary to restore confidence in the economy and suggested a less aggressive approach to bringing down the budget deficit.
“The MPC has taken a very sensible decision to keep interest rates on hold”, said Andrew Sentence, PwC’s senior economic adviser.
The BOE’s signal that stimulus for the economy is in the pipeline came after earlier moves to shore up the financial system in the wake of the referendum June 23, when Britons voted 52% to 48% to quit the EU.
ANALYST’S TAKE: “There is a general expectation among economists that the BoE and the ECB will introduce more stimulus in the coming weeks and months and this is likely to support the recent bounce”, said Alex Furber of CMC Markets, referring to the Bank of England and the European Central Bank. With gilt and corporate bond yields also ultra-low, I expect savers and investors’ capital will ultimately be committed to equities in search of higher yields, accepting that the value of investments and any income from them will rise and fall, so investors could make a loss.
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Bank policymakers hinted at an expansion of that program, which is created to keep market interest rates low and encourage financial institutions to lend, is possible ahead of their next decision on August 4.
