The Bank of England on Thursday unexpectedly left unchanged its key interest rate at a record low of 0.5%.
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Most analysts had expected a 25 basis point cut to a historic-low benchmark rate after keeping the rate at 0.5% for more than seven years.
David Cameron, who resigned after the Brexit referendum results, took leave of his office at 10 Downing Street, wishing May good speed as she takes on the country’s exit from the European Union, a process that would prove daunting to anyone.
But the rate cut did not materialise, with eight of nine members on the BoE’s monetary policy committee voting to leave rates unchanged.
However the Bank’s Monetary Policy Committee has signalled most of its members expect monetary policy will be “loosened in August” failing a return to more normal economic conditions. In the immediate aftermath of the bank’s announcement, the pound was up 1.9 percent at $1.3367 and 1.5 percent firmer at 1.20 euros.
Our concerns for GBP are two-fold: the macroeconomic impact as data for the full post-Referendum period emerge and the constraints placed on the currency by virtue of the UK’s sizeable current account deficit.
“Britain has got a new prime minister, which, alongside expectations of more stimulus from the Bank of England, has brought a sense of relief to markets, so gold is easing and everything else is rising on that”, Citi strategist David Wilson said.
“The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target and in a way that helps to sustain growth and employment”.
Emerging markets remained firmly on the front foot as they continued to benefit from the prospect of more cheap money from big central banks.
The Reuters poll showed the Bank is expected to announce 50 billion pounds of extra asset purchases next month when it will factor the Brexit hit into its economic forecasts.
Financial markets have reacted sharply to the United Kingdom’s vote to leave the European Union.
“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 accompanying the decision.
“Taken together, these indicators suggest economic activity is likely to weaken in the near term”, the minutes say.
European markets and USA futures made early gains after a mixed performance in Asia following calming words from Britain’s new Treasury chief and ahead of a decision by the Bank of England’s Monetary Policy Committee on whether to stimulate the economy. 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.
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But, Mr Carney has stressed of his reluctance to reduce rates below 0.25%, and has warned: “If interest rates are too low or negative, the hit to bank profitability could perversely reduce credit availability or even increase its overall price”.
