The Monetary Policy Committee voted 8-1 to leave rates unchanged, however this does not rule out further economic measures at a later stage if the Bank of England determines the economy requires stimulation to ride out any impact that Brexit might have.
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The most eagerly awaited Bank of England policy decision in years came and went without any change in interest rates or asset purchases. Indeed, the minutes from the committee meeting said that most members expect monetary policy to be loosened at its next meeting in August, which suggests that a near-definite cut could be on the cards.
But it said the impact of the Brexit vote “could lead to a significantly lower path for growth” and the Bank cut its forecasts for investment in the housing sector significantly while also lowering its near-term expectations 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. “Taken together, these indicators suggest economic activity is likely to weaken in the near term”.
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”.
Sterling, however, rose by three cents against the dollar initially before settling at a high for the month – two cents up – above $1.33.
“The precise size and nature of any stimulatory measures will be determined during the August forecast and Inflation Report round”, it said in its statement Thursday. He had warned of trouble before the vote and said recently that the negative impacts of the European Union exit vote had begun to crystallize.
Policymakers discussed various easing options and combinations thereof at the meeting, the bank said.
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%. We continue to expect it to cut rates down to 0.00% and possibly ease using unconventional tools as well in August but given today’s announcement, we believe the risk is the BoE will ease less aggressively, e.g.by cutting only 25bp.
Sterling also found support after new British Prime Minister Theresa May appointed Philip Hammond as the new Chancellor of the Exchequer, replacing George Osborne.
But the bank’s rate-setters said yesterday they would wait three more weeks to see the intensity of the Brexit hit to Britain’s economy before deciding on the need for any stimulus.
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In spite of market uncertainty over the past three weeks, lenders across the United Kingdom are taking advantage of the market to offer lower rate mortgages to potential buyers.
