Euro zone bond yields rose on Thursday after the Bank of England wrong-footed investors by holding interest rates steady at its first meeting since Britain’s vote to leave the European Union last month.
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Chris Williamson, chief economist with financial data firm Markit, said the BoE had opted not to rush into “a knee-jerk reaction” to the Brexit vote.
‘However, there are preliminary signs that the result has affected sentiment among households and companies, with sharp falls in some measures of business and consumer confidence, ‘ the committee notes added.
Money markets now price around a 20 percent chance that the European Central Bank cuts rates by 10 basis points to minus 0.50 percent next week, having seen around a 30 percent chance before the BoE decision.
The Bank of England has once again voted to keep interest rates on hold at 0.5%, despite forecats it would cut rates at this month’s meeting of its Monetary Policy Committee.
London’s premier share index was 0.9% higher on the day amid investor hopes of stimulus for the economy in the wake of the Brexit vote.
“The committee discussed various easing options and combinations thereof”, the bank said in a statement.
Bank of England Gov. Mark Carney and seven other policymakers at the central bank chose to keep policy on hold on Thursday, including maintaining the benchmark rate – so-called Bank Rate – at 0.5 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.
However, minutes from the MPC meeting suggest that most members believe a cut will happen in its next meeting in August.
The unexpected move has led many to assume any potential cut in the base interest rate will not take place until August, when the MPC has a greater understanding of the economic impact of Brexit.
The minutes published on Thursday suggested the Bank was cautious about making big cuts to interest rates, saying the composition of any additional stimulus measures “would take into account any interactions with the financial system”.
The pound jumped in response to the MPC’s announcement, although both the FTSE 100 and FTSE 250 fell. 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.
However, the Bank said the United Kingdom market proved resilient.
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The central bank is due to publish its quarterly Inflation Report on August 4, which will include new forecasts for growth and inflation and the MPC’s first full take on how the referendum outcome is set to affect the United Kingdom.
