BoE prepares next move to contain Brexit fallout

The decision by the Bank of England to hold interest rates in July was a pause for breath and a chance to calibrate its next move, rather than a judgment that the economic damage from Brexit has been contained.

The government might have more of a grip on a new economic strategy, but the BoE remains concerned that shocks from Brexit will damage growth and raise inflation.

Mark Carney, BoE governor, met Philip Hammond, the new chancellor, last Thursday, and told him the shock from the Brexit vote was serious. Consumer and business confidence has been hit hard, there is likely to be lower business investment, and household consumption and growth are on a significantly lower path with higher inflation. That much is written clearly in the Monetary Policy Committee minutes, taken last Wednesday as Theresa May was becoming prime minister. For one member of the committee, Gertjan Vlieghe, the MPC's delay in taking action is a stumble. He voted to cut interest rates immediately a quarter point to leave them at 0.25pc, warning that the hit to the economy was sufficient to merit ' an immediate loosening of monetary policy, to be supplemented by a package of additional measures in August'.

Central bank fears effect on growth and inflation The decision to hold rates will be almost certainly followed next month with some sort of monetary policy easing. The MPC notes show that the committee had already discussed 'a range of possible stimulus measures and combinations thereof', while also taking note of the effect of cutting rates or restarting the money printing presses on the financial system. Quantitative easing is under discussion as part of next month's possible response. "Committee members had an initial exchange of views on the various possible packages of measures," the minutes revealed.

But the BoE's inaction last week certainly surprised financial markets, which had taken Mr Carney's speech a fortnight ago as a promise to act quickly. Officials point out that the governor had actually only committed to easing monetary policy in the summer, with 'an initial assessment' in July and ' a full assessment complete with a new forecast' in August. Since making that speech, however, the BoE lost control of the message and by the start of the meeting, financial markets and most City economists expected a rate cut in the July meeting.

Alan Clarke of Scotiabank, said that 'virtually nobody' was expecting a rate cut before Mr Carney's intervention a couple of weeks ago, adding that "for no apparent reason, Governor Carney decided to tease the market, let it price in a high probability of a rate cut, only to disappoint". "As if the situation wasn't volatile and uncertain enough, the BoE governor poured petrol on the flames. This was a completely unnecessary intervention." Unusually severe criticism of the MPC also rained in from former members of the committee.

Adam Posen, a member between 2009 and 2012 and now president of the Peterson Institute, argued the committee should have immediately cut rates to zero.

"This is not a fine calibration issue," he said. "Brexit is a real economic shock and a change in the fundamentals," he said, arguing that now was the time for the BoE to ' get out in front of it'. Sushil Wadhwani, MPC member between 1999 and 2002 and now chief executive of asset manager Wadhwani, drew a parallel with the BoE's response in September 2001, when it cut rates in a specially convened meeting.

While he stressed that central banks should never slavishly follow expectations, unless there is a very good reason to delay, disappointing the markets made it more difficult to be trusted next time. "Given that we are entering a very difficult period, why jeopardise one's credibility?" Mr Wadhwani said. Others in the academic world also were quick to criticise.

Michael McMahon of Warwick university said that waiting "simply adds monetary policy uncertainty to the already elevated uncertainty in the UK".

But these complaints were tempered with significant support from economists who recognised the bank had time to act because the financial markets were calm even though they had moved sharply since the vote to leave the EU.