Bank of England signals August stimulus as rate kept at 0.5%2 min read . Updated: 14 Jul 2016, 05:04 PM IST
The decision is likely to shock investors, who had priced in more than an 80% chance the rate would be lowered as Britain reels from the Brexit vote
London: The Bank of England unexpectedly kept its key interest rate unchanged, while signalling more stimulus will come in August to aid the post-Brexit economy.
The nine-member Monetary Policy Committee, led by governor Mark Carney, voted 8-1 to keep the benchmark at a record-low 0.5%, with only Gertjan Vlieghe saying the outlook justified an immediate reduction. The decision is likely to shock investors, who had priced in more than an 80% chance the rate would be lowered as Britain reels from its decision to quit the European Union. While the central bank said it discussed what measures it could use to help the economy, it stopped short of detailing what those might be.
“Most members of the committee expect monetary policy to be loosened in August," officials said, according to the minutes of their 13 July meeting. “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."
The central bank is due to publish its quarterly Inflation Report on 4 August, which will include new forecasts for growth and inflation and the MPC’s first full take on how the referendum outcome is set to affect the UK.
Thirty-one of 54 economists in a Bloomberg survey had predicted pre-emptive action as Britain prepares to navigate a split from its biggest trading partner, and after Carney said in a speech that easing was likely to be needed over the summer.
The governor has taken a proactive approach since the referendum, offering additional liquidity operations and relaxing bank rules to encourage lending.
For Vlieghe, “the subdued economic outlook before the referendum had already come close to warranting further stimulus," the minutes showed. “The early evidence supported the view that demand was likely to weaken further."
The MPC said recent reports suggested economic activity was likely to be depressed in the near-term, following the vote.
Initial reports suggest the outlook has deteriorated, with retailers reporting their worst June in a decade and a gauge of consumer confidence plunging the most in 21 years.
“Some of the MPC members would prefer to base their thinking on a broad look at the macro economics and have some really detailed deliberations about that, as will be the case leading up to August," Chris Hare, an economist at Investec in London and a former BOE official said before the minutes were released. “They don’t want to move too quickly without a broader strategy in mind."
The “sharp fall" in the pound was likely to put upward pressure on inflation in the short-term, officials said. Bloomberg