The Bank of England has surprised markets by keeping interest rates on hold at 0.5 per cent, adopting a wait-and-see approach until more data on the impact of Brexit is available.
Markets had priced in a more than 80 per cent chance of a rate rise, but an overwhelming majority of the MPC, including Governor Mark Carney, voted for maintaining the status quo. Carney had publicly indicated recently that he supported monetary easing. Only one MPC member – Gertjan Vileghe – dissented from the no change consensus and voted for a 0.25 per cent rate cut. Analysts are predicting the cut will now come in August, when more growth and inflation figures are available.
The immediate reaction in markets is that UK government bond yields are higher, the FTSE 100 has fallen back by around 70 points to overnight levels and sterling has rallied against both the US dollar and euro.”
Royal London Asset Management head of derivatives Darren Bustin: “The Bank’s decision to keep base rates on hold today has come as a surprise to the markets, particularly Mark Carney’s personal vote to keep rates on hold. This is another example of ‘forward misguidance’ from a governor who had previously indicated very publicly that more monetary easing was on the table including the possibility of action at the July meeting.
“Even if action is expected in August, markets may be much more sceptical in the run up to the next Monetary Policy Committee meeting against a backdrop of increased uncertainty.”
Investec Wealth & Investment head of fixed interest Darren Ruane says: “The Bank of England surprised investors today by not reducing the UK’s base interest rate to 0.25 per cent from 0.5 per cent or adding to its quantitative easing policy which is at £375 billion. Market implied interest rates were pricing in close to a 100 per cent probability of a rate reduction while around half of economists expected a change. In some ways, the decision should not be a big surprise to markets because monetary policy committees prefer to make a change in months where there is a full review of growth and inflation figures, and this does not occur until the August meeting. In addition, the Bank may want to wait to see the immediate impact of Brexit before making any decisions.”
LGIM senior European economist Hetal Mehta says: “We expected that the Bank of England would hold rates for the time being. We believe it is too early for the Bank to have any meaningful data on how the economy and financial conditions are being affected by the confidence shock ensuing from the EU referendum outcome, and therefore too early to calibrate the appropriate policy response.
“We expect the Bank of England will make a more comprehensive assessment in August, and that in the coming months interest rates will be cut by 50bps and further measures such as QE and credit easing will be announced.”