Bank of England jolts sterling as it keeps interest rates on hold
LONDON (Reuters) – The Bank of England wrong-footed investors by keeping interest rates on hold on Thursday. But it held out the prospect of a stimulus package soon to help the economy cope with Britain’s decision to leave the European Union.
The battered pound surged by more than 2 percent as the central bank held its Bank Rate at 0.50%, contrary to widespread expectations of a first cut in more than seven years.
Governor Mark Carney said two weeks ago that he expected the BoE to give the economy more help over the summer.
But Carney and his fellow rate setters said on Thursday they would wait three more weeks to see the intensity of the Brexit hit to the economy before deciding on the need for any stimulus.
“In the absence of a further worsening in the trade-off between supporting growth and returning inflation to target on a sustainable basis, most members of the committee expect monetary policy to be loosened in August,” minutes of the meeting said.
“The precise size and nature of any stimulatory measures will be determined” in August, they said.
Only one of the Monetary Policy Committee’s nine rate setters – Jan Vlieghe, who has previously floated the idea of more help for the economy – voted for a cut at the July meeting.
The BoE has held its bank rate at 0.5% since March 2009, when the global financial crisis was hammering Britain. Investors have spent much of the past three years speculating about when borrowing costs would rise as the economy picked up.
Now the question investors and businesses are asking is whether Britain can avoid falling back into recession.
Some economists said the BoE might consider joining forces with the new government to use public spending as a way to boost growth, something opposed by former finance minister George Osborne, who stepped down on Wednesday.
“What chance the government finances investment projects using infrastructure bonds which the BoE ultimately buys?” Jefferies economist David Owen said in an email to clients.
Carney met the new chancellor of the exchequer, Philip Hammond, on Thursday, shortly after Hammond said the government would do whatever was necessary to restore confidence in the economy.
Investec economist Victoria Clarke said it was possible the BoE and the government were preparing a coordinated package that could be announced in August.
“Whatever we are to conclude, today’s MPC minutes are certainly prepping markets for much more than just a bank rate cut on August 4,” she said.
The decision to hold rates pushed sterling to a two-week high against the US dollar, and government bond yields rose.
Economists had mostly expected a halving of bank rate to 0.25% on Thursday, to be followed by a revival of the BoE’s £375 billion ($499b.) bond-buying program at its next meeting on August 4, according to a Reuters poll.
Chris Williamson, the chief economist of data firm Markit, said the BoE had opted not to rush into “a knee-jerk reaction” to the Brexit vote, but it would “need to do a lot more to shore up confidence and keep the gears of the economy turning.”
Some economists complained that Carney had given them a wrong steer when he said in a speech on June 30 that he thought more stimulus would be needed soon.
Scotiabank economist Alan Clarke said Carney had built up expectations for a July rate cut, echoing other premature signals that Carney has sent since the financial crisis.
“As if the situation wasn’t volatile and uncertain enough, the BoE governor poured petrol on the flames,” Clarke said.
Others said the quicker-than-expected appointment of Theresa May as Britain’s new prime minister on Wednesday and the calming of financial markets had lessened the need for immediate action.
“He is clearly keeping further monetary-policy powder dry until it is most needed,” Close Brothers Asset Management chief investment officer Nancy Curtin said.
The minutes suggested the bank was cautious about making big cuts to rates, saying any additional stimulus measures “would take into account any interactions with the financial system.”
Carney has previously suggested he does not favor taking rates below zero, due to the potential impact on banks.
The MPC also said the impact of the Brexit vote “could lead to a significantly lower path for growth,” and the bank cut its forecasts for investment in the housing sector while also lowering its near-term expectations for house prices.
Interest among buyers in British housing fell to its lowest level since mid-2008, according to data released on Thursday. Consumer expectations also fell.