Bank of England defies expectations of rate cut

The Bank of England wrong-footed investors by keeping interest rates on hold, but 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 percent, contrary to widespread expectations of a first cut in more than seven years.
Gov. Mark Carney said two weeks ago that he expected the BoE to give the economy more help over the summer.
But the bank’s rate-setters said on Thursday they would wait three more weeks to see the intensity of the Brexit hit to Britain’s 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, it 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 percent since March 2009, when the global financial crisis was hammering Britain and 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.
Economists taking part in a Reuters poll had mostly expected a halving of Bank Rate to 0.25 percent on Thursday, to be followed by a revival of the BoE’s 375 billion pound ($499 billion) bond-buying program at its next meeting on Aug. 4.
Chris Williamson, chief economist with 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.”
The surprise decision to keep rates on hold pushed sterling to a two-week high against the US dollar of $1.3480 and British government bond yields rose. British share prices lost some of their earlier gains and housebuilders such as Berkeley and Barratt Developments turned negative.
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.
Alan Clarke, at Scotiabank, said Carney 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, should we start to see a meaningful slowdown,” Nancy Curtin, chief investment officer at Close Brothers Asset Management, said.
Carney met Britain’s new finance minister, Philip Hammond, on Thursday shortly after Hammond suggested a more gradual approach to bringing down the budget deficit.
Victoria Clarke, an economist at Investec, said it was possible that the BoE and the government were preparing a coordinated package to 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 Aug. 4,” she said.
The minutes published on Thursday suggested the Bank was cautious about making big cuts to interest rates, saying the composition of 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, because of the potential impact on banks.
The MPC raised its expectation for growth in the April-June period — only a few days of which fell after the referendum — to 0.5 percent from a previous forecast of 0.3 percent.
But it 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 significantly while also lowering its near-term expectations for house prices.
Data released early on Thursday showed interest among buyers in Britain’s housing market fell to its lowest level since mid-2008. Consumer expectations also fell.

Source: Arab News