The Bank of England’s decision to both hold rates and comes as yields on government bonds have fallen to record lows – with the yields on benchmark 10 year gilts falling to record lows since the European Union referendum.
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Euro zone bond investors on Thursday turned their attention to Britain, where the Bank of England concluded its first meeting since Brexit with a decision to leave interest rates unchanged and said it was likely to deliver stimulus soon.
The bank’s governor, Mark Carney, has repeatedly expressed willingness to deploy all the tools at his disposal to ameliorate the effects of Brexit, including loosening monetary policy.
This they say is owing to Theresa May’s quick appointment as prime minister having reduced some of the political uncertainty that has gripped Britain since the shock referendum result.
Data released early on Thursday showed interest among buyers in Britain’s housing market diminished to its lowest level since mid-2008, as the global financial crisis was deepening, adding to early signs of the Brexit hit to the economy.
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.
The bank said economic activity is likely to weaken in the near term, and it noted that some businesses are already delaying investment projects and postponing hiring decisions. “Even with that, it’s clear that the market is still running significant sterling shorts and some of these will be squeezed further ahead of next week’s United Kingdom data”, he said, referring to bets an asset’s price will decline.
“Initially August had looked more likely, but with economic data deteriorating and markets still nervous, it now looks probable the MPC will adjudge that immediate action is warranted”, said Ben Brettell, senior economist at Hargreaves Lansdown.
The bank will re-start its asset purchases later this year – probably in August – topping up the £375bn programme it wound up in 2012 with another £50bn, the poll found.
However, the committee gave a further hint that rates may indeed be reduced at its meeting next month, which coincides with its quarterly Inflation Report.
Following the result Carney said that in the coming months the Bank would “take whatever action is needed to support growth” subject to the inflation target of 2% being met. However, the bank signaled its intention to stimulate the British economy at its next meeting in three weeks when policymakers will be armed with fresh economic forecasts.
So why wait? If interest rates are going to be cut anyway, why not get on with without delay?
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Thirty-one of 54 economists surveyed by Bloomberg predicted a cut, while 23 expected the BOE would keep rates on hold. Sterling was the main beneficiary, gaining more than a cent against the dollar.
