Bank of England doesn’t cut interest rates, defying expectations

The expected cut in rates is likely to happen in August

 

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.

At its first meeting since the EU referendum, the bank’s monetary policy committee (MPC) voted eight to one to keep the historically low rate that has been in place since 2009.

However, the bank has warned that rates are likely to be cut in August, as the committee’s initial assessment suggests that the vote has affected business and consumer confidence negatively, with suggestions that some businesses are delaying investment and that activity in the housing sector is about to decline.

However, as the BBC’s Kamal Ahmed points out, the MPC must balance its responses to two competing priorities — ‘a slowdown in economic growth following the referendum vote which many economists believe could tip the economy into recession’ and ‘a possible increase in inflation sparked by the fall in the value of sterling.

Essentially, the bank has behaved cautiously, preferring to wait until more economic data is available before making any major monetary shifts.

The bank’s governor, Mark Carney, has repeatedly expressed willingness to deploy all the tools at his disposal to ameliorate the effects of Brexit, including loosening monetary policy.

However, he also emphasises that monetary policy alone cannot resolve the problems facing the economy — putting pressure on the new chancellor, Philip Hammond, to take expedient action.

The pound jumped in response to the MPC’s announcement, although both the FTSE 100 and FTSE 250 fell.

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