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Bank of England interest rate announcement revealed

Bank of England interest rate announcement revealed

Bank of England interest rate announcement revealed After the turmoil of the Brexit decision that has left the financial markets in disarray and sent share prices in several leading insurance firms tumbling, the Bank of England has surprised many analysts by failing to announce its first rate cut for seven years – maintaining the rate at 0.5%.

Rumours had been rife ever since the Brexit vote that Mark Carney, the Bank’s governor, would implement a rate cut in either July or August – it seemed to not be a matter of “if”, but “when”. Interest rates have been unchanged since being cut to a record low level of 0.5% in March, 2009 – however, the wait for a further reduction continues.

Making the announcement, the Bank of England issued the following statement at noon today:

“Financial markets have reacted sharply to the United Kingdom’s vote to leave the European Union.  Since the Committee’s previous meeting, the sterling effective exchange rate has fallen by 6%, and short-term and longer-term interest rates have declined.  Reflecting the fall in the level of sterling, financial market measures of inflation expectations have risen moderately at short-term horizons, but only to around historical averages, and have fallen slightly at longer horizons.  Markets have functioned well, and the improved resilience of the core of the UK financial system and the flexibility of the regulatory framework have allowed the impact of the referendum result to be dampened rather than amplified.

“Official data on economic activity covering the period since the referendum are not yet available.  However, there are preliminary signs that the result has affected sentiment among households and companies, with 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.  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.

“Twelve-month CPI inflation was 0.3% in May and remains well below the 2% inflation target.  Measures of core inflation have been stable at a little over 1%.  The shortfall in headline inflation is due predominantly to unusually large drags from energy and food prices, which are expected to attenuate over the next year.  In addition, the sharp fall in the exchange rate will, in the short run, put upward pressure on inflation as the prices of internationally traded commodities increase in sterling terms, and as importers pass on increases in their costs to domestic prices.

“Looking further forward, the MPC made clear in its May Inflation Report, and again in the minutes of its June meeting, that a vote to leave the European Union could have material implications for the outlook for output and inflation.  The Committee judges that a range of influences on demand, supply and the exchange rate could lead to a significantly lower path for growth and a higher path for inflation than in the central projections set out in the May Report.  The Committee will consider over the coming period how the outlook for the economy has changed in light of the referendum result and will publish its new forecast in its forthcoming Inflation Report on 4 August.

“The MPC is committed to taking whatever action is needed to support growth and to return inflation to the target over an appropriate horizon.  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.

“Against that backdrop, at its meeting ending on 13 July, the majority of MPC members judged it appropriate to leave the stance of monetary policy unchanged at present.  Gertjan Vlieghe preferred to reduce Bank Rate by 25 basis points at this meeting.”
Financial markets had earlier in the day put the probability of a rate cut as high as 80% with Ben Brettell, senior economist at Hargreaves Lansdown, telling the BBC that: “Initially August had looked more likely, but with economic data deteriorating and markets still nervous, it now looks probable the MPC will adjudge that immediate action is warranted.”
However, Joshua Mahony, market analyst at IG, told the BBC that a lack of economic data since the referendum was likely to prompt the Bank to hold fire: “There is a significant possibility that Mark Carney will disappoint by postponing a rate cut until the August meeting,” he said.
In addition to the woes for the insurance sector, the service and construction sectors have both suffered sharp slowdowns – construction suffered its worst month in seven years during June. The Bank has been attempting to cushion the Brexit blow ever since – having already relaxed rules to allow banks to lend as much as an extra £150 billion.

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