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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“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.
The central bank’s quantitative easing (QE) programme, launched alongside record-low interest rates during the global financial crisis, has enabled an additional US$494 billion to move through the economy.
The Bank of England refrained from cutting the interest rate on Thursday, but signaled more action next month when policymakers get more assessments on economic growth and consumer prices from the latest Inflation Report.
“The bank’s surprise caution came as a jolt to currency markets that had convinced themselves that a cut today was a done deal”. Since the committee’s previous meeting, the sterling’s effective exchange rate has fallen by 6 per cent, and short-term and longer-term interest rates have declined.
They will wait until the bank’s quarterly forecasts on August 4 before taking further action and deciding on “various possible packages of measures”.
The Bank of England said it was likely to deliver stimulus in three weeks.
Governor Mark Carney has signaled there will be more stimulus during the summer, but he has expressed concern about what a big interest rate cut would do to the profits of United Kingdom based banks.
The initial impact of the news has seen the pound build on yesterday’s boost, shepherded by Theresa May’s appointment as Prime Minister, rising to $1.336 against the dollar and €1.20 against the euro in the wake of the Bank’s announcement.
It said a preview of the June survey from the Royal Institution of Chartered Surveyors showed a “marked weakening” in activity and prices. Also, while market pricing – even after today’s surprise move – remains aggressive (34bp worth of cuts accumulated for H2 16) more BoE easing would also weigh on the GBP.
However, the Bank put households on notice that a rate cut was certain if the economic situation failed to improve over the next month.
The decision is having a mildly negative effect upon equity markets so far, as it calls into some question the extent of forthcoming “helicopter money” QE programs that are on the table at several central banks.
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Chris Williamson, chief economist with data firm Markit, said the Bank had opted not to rush into “a knee-jerk reaction” to the Brexit vote but it would “need to do a lot more to shore up confidence and keep the gears of the economy turning”.
