The Bank of England will hold interest rates at 0.5 per cent, it has been announced, surprising economics and traders who expected that rates would be cut to support the economy post-Brexit.
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But the Bank shocked markets – and sent the pound up to 2 percent higher – by stopping short of cutting interest rates on Thursday as it awaits the first numbers on the economy taken since the June 23 referendum.
Many big banks, economic forecasters and rating agencies have already slashed their forecasts for growth in the United Kingdom following the vote to leave. The pound collapsed to its lowest level in 31 years and remains under pressure.
Emerging market currencies broadly rose against the dollar including the South Korean won which tacked on 0.75 percent after its central bank kept its key interest rate unchanged at a record low 1.25 percent, as the country’s growth outlook struggles. Only Gertjan Vlieghe preferred to reduce the rate by 25 basis points.
The nine-member panel did hint it will loosen policy in August when it will have fresh forecasts about the state of the British economy.
The Bank said that some businesses were starting to delay investment projects and postpone recruitment decisions, while a “significant weakening” in activity in the housing market was expected.
The potential for BOE action next month, which investors believe could set off another round of global central bank- and government-led stimulus, meant broader markets were not too be pushed off course.
“Presumably, the reason most Committee members decided not to act today was to allow greater time to assess the likely effects of the UK’s vote to leave the EU in the August Inflation Report, which is just three weeks away”, said Jonathan Loynes, chief European economist at Capital Economics. Governor Carney has already said that August forecast would play a decisive role in determining the stimulus.
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.
Hammond told media that a budget would not be submitted before the British autumn, adding that London’s key financial sector must retain access to the European Union single market following Brexit.
Returns on United Kingdom government bond yields rose sharply, with the 10-year yield rising about four basis points to 0.815% after the decision, before easing back to 0.8%.
Mr Hammond met Mr Carney to discuss the Bank’s decision earlier on Thursday morning.
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As well as keeping borrowing rates unchanged, the bank’s Monetary Policy Committee also chose to keep its asset-purchase program unchanged at 375 billion pounds ($500 billion).
