The Bank of England today kept interest rates on hold at their record low of 0.5 per cent – confounding widespread expectations of a cut in borrowing costs.
The Bank’s monetary policy committee (MPC) now looks set to cut rates next month as members weigh up the economic impact of Britain’s decision to leave the European Union.
Most members of the committee expect monetary policy to be loosened in AugustBank of England
Bank governor Mark Carney signalled recently that policymakers on the monetary policy committee (MPC) would vote to slash rates to shore up the economy after the EU referendum.
But the nine-strong committee voted to keep borrowing costs on hold for another month, with Gertjan Vlieghe – a former speechwriter for previous Bank of England governor Lord King – emerging as the sole dissenter calling for a reduction to 0.25 per cent.
CBI chief economist Rain Newton-Smith said: “While the committee has decided to keep rates on hold, the governor has signalled that a range of options are being considered to alleviate the economic uncertainty following last month’s referendum. The bank has indicated that monetary policy may loosen in August, once it has had more time to assess the impact of the Brexit vote on activity.
“Policymakers have several tools at their disposal, and have already taken some measures to pre-emptively ease liquidity bottlenecks and ensure finance continues to flow around the economy. Meanwhile, businesses will be looking for a commitment from the new government to preserve the openness of our economy in terms of access to markets, skills and trade deals.”
Maike Currie, investment director for personal investing at Fidelity International, said: “Much like the Brexit result, the Bank of England has defied market expectations by choosing to maintain interest rates at 0.5 per cent.
“After seven years, and almost 90 meetings of policy inaction, today’s interest rate decision from the Bank of England was always going to make investors sit up right. Markets were pricing in an 80 per cent chance of a rate cut, following a revealing speech by governor Mark Carney last week, stating that the Brexit result meant a deteriorated outlook for the British economy and that ‘some monetary policy easing will likely be required over the summer’.”
Borrowing costs have been on hold since March 2009, when the Bank slashed rates to an all-time low of 0.5 per cent at the height of the financial crisis.
Minutes of the MPC meeting said: “Committee members made initial assessments of the impact of the vote to leave the European Union on demand, supply and the exchange rate.
“In the absence of a further worsening in the trade-off between supporting growth and returning inflation to target on a sustainable basis, most members of the committee expect monetary policy to be loosened in August.
“The precise size and nature of any stimulatory measures will be determined during the August forecast and Inflation Report round.”
Recent signs for growth have been worrying, with industry surveys for the services sector and the construction industry pointing to a sharp slowdown, with the latter experiencing its worst month in seven years for June.
Although official figures on economic activity covering the period since the referendum are not yet available, the Bank said there were “preliminary signs” that the Brexit vote has affected sentiment among households and companies, pointing to “sharp falls” in some measures of business and consumer confidence.
“Early indications from surveys and from contacts of the Bank’s agents suggest that some businesses are beginning to delay investment projects and postpone recruitment decisions,” the MPC minutes said.
“Regarding the housing market, survey data point to a significant weakening in expected activity. Taken together, these indicators suggest economic activity is likely to weaken in the near term.”
The pound tumbled to fresh 31-year lows last week on the economic gloom, although it has since recovered some of the ground lost.
Brexit jitters have also seen property funds go into lockdown after investors rushed to pull out their money over fears of a collapse in real estate prices.
Carney had indicated only last summer that rates may need to rise “around the turn of the year”, but Britain is now facing the reality of zero, or even negative, rates.
The Bank governor has been quick to stress he is personally reluctant to reduce rates lower than 0.25 per cent or into negative territory.
He said in a recent speech: “As we have seen elsewhere, if interest rates are too low or negative, the hit to bank profitability could perversely reduce credit availability or even increase its overall price.”
The Bank has already unveiled a series of measures to help limit the Brexit blow, relaxing banking rules to boost their lending firepower by up to £150bn and pledging to pump in at least £250bn if needed to calm markets in the immediate aftermath of the Brexit decision.
Michael Metcalfe, head of global macro strategy at State Street Global Markets, said today’s decision by the MPC had delivered two surprises.
“The first is that interest rate markets had forecast more than a 70 per cent chance of a cut,” she said.
“But the bigger surprise is the second one, namely that the Bank of England was ready to disappoint market expectations so soon after the Brexit vote. While a rate cut can still come at the next meeting, the delay hints at concern about the inflationary impact of sterling weakness and some uncertainty as to how rapidly the economy will actually slow.”
Latest official figures show that inflation, as measured by the consumer prices index, remained well below the Bank’s 2 per cent target in May, standing at just 0.3 per cent. Data for last month will be published on Tuesday.
“The MPC is committed to taking whatever action is needed to support growth and to return inflation to the target over an appropriate horizon,” today’s committee minutes said.
“To that end, most members of the committee expect monetary policy to be loosened in August. The committee discussed various easing options and combinations thereof. The exact extent of any additional stimulus measures will be based on the committee’s updated forecast, and their composition will take account of any interactions with the financial system.”