Bank of England holds rates in surprise move; signals August easing.
This article is originally referred from XM Investment Research Desk.
The Bank of England defied market expectations of an interest rate cut by holding rates at 0.5% in a surprise move on Thursday. Most market participants had priced in a 0.25% rate cut at today’s meeting as the Bank of England takes measures to cushion the UK economy from the anticipated negative impact from Brexit.
However, an August move is now a certainty as indicated in the Bank’s accompanying statement from today’s announcement. According to the statement, “most members of the Committee expect monetary policy to be loosened in August”. The Monetary Policy Committee discussed “various easing options and combinations thereof” in today’s meeting but held off from taking any action as it wanted to wait for August’s updated economic projections before deciding on the exact size and nature of any stimulation measures.
The BoE has been at the forefront of efforts to stabilize the UK financial sector and calm market panic since the shock outcome of the June 23 referendum when Britons voted to leave the European Union. The Bank has been providing emergency liquidity to the banking system as a financial backstop since the immediate aftermath of the Brexit vote. In addition, the Bank’s Financial Policy Committee reduced the counter-cyclical capital buffer for UK banks from 0.5% to 0% on July 5 in order to free up to £150 billion for lending to British households and businesses.
The pound shot up immediately after the announcement as markets were expecting at least a 25bps cut in today’s meeting. Sterling briefly jumped to 1.3475 dollars but soon eased to around 1.3350 dollars in mid-European session. The euro also benefited from pound’s move as it rose to 1.1164 dollars, but it was down against sterling at 0.8340 pounds.
Today’s decision was not unanimous though – Gertjan Vlieghe was the sole member who wanted an immediate cut in the Bank’s base rate to 0.25%. All eyes will now be on next month’s meeting on August 4 when the latest quarterly inflation report should provide the MPC a clearer picture of what effect the Brexit vote is having on the British economy.
In a possible sign that the MPC is considering substantial monetary easing, the Committee appeared not too concerned about the possible upwards effect on prices from the pound’s sharp depreciation since the vote outcome. According to the Committee, “financial market measures of inflation expectations have risen moderately at short-term horizons, but only to around historical averages, and have fallen slightly at longer horizons”.
With several consumer and business surveys already pointing to a deterioration in sentiment both before and after the referendum, UK economic growth is expected to take a significant hit from the reduced business and consumer spending. A drop in foreign capital inflow, a vital source of funding for Britain’s massive current account deficit, could also destabilize the economy with already some evidence of declining investment in the property sector. However, any longer-term impact from Brexit will likely depend on what measures the BoE announces in August as well as the duration and terms of Britain’s trade negotiations with the EU and the rest of the world.
Original Source: XM Investment Research Desk