LONDON – The Bank of England kept interest rates on hold and refrained from injecting more money into the British economy Thursday, despite some clear evidence of the initial economic damage caused by the country’s decision last month to leave the European Union.
The decision was somewhat a surprise – most economists had expected the central bank to cut its main interest rate from the record low of 0.5 per cent to shore up the economy, which appears to have taken a hit since the June 23 vote to leave the EU.
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The surprise was evident in the performance of the British pound, which has slumped to 31-year lows against the dollar in the aftermath of the vote.
In the immediate aftermath of the bank’s announcement, the pound was up 1.9 per cent at $1.3367 and 1.5 per cent firmer at 1.20 euros.
As well as keeping borrowing rates unchanged, the bank’s Monetary Policy Committee also chose to keep its asset-purchase program unchanged at 375 billion pounds ($500 billion).
The nine-member panel did hint it will loosen policy in August when it will have fresh forecasts about the state of the British economy.
“The precise size and nature of any stimulatory measures will be determined during the August forecast and Inflation Report round,” it said in its statement accompanying the decision.
The markets were anticipating a cut because Bank of England Gov. Mark Carney had suggested some sort of stimulus would be offered during the summer months as his pre-vote warnings about the negative impact of the EU exit vote on the economy have begun to crystallize.
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A plunge in consumer confidence as measured by market research firm GfK and evidence of markedly reduced business sentiment offered the backdrop for action sooner rather than later.
But Aberdeen Asset Management Economist Paul Diggle said the bank was taking its time to assess the full picture of the impact of the vote.
“The Bank of England has decided that patience is a virtue,” he said. “There’s going to be a bit of disappointment in financial markets. They had taken Carney’s earlier comments about easier monetary policy to heart and forgot his reputation for changing his mind.”
The next meeting is only three weeks away, however, and Carney had also made the point that the two sessions should be seen in conjunction with one another.
“By then, Carney and his colleagues will have a few extra post-referendum data points to digest as well as a new set of forecasts,” Diggle said. “The market should get its way then, with an interest rate cut likely and renewed quantitative easing possible.”
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