LONDON • The Bank of England (BOE) kept interest rates unchanged yesterday, wrong-footing many investors who had expected the first cut in more than seven years as Britain's economy reels from last month's vote to leave the European Union.
The BOE said it was likely to deliver stimulus in three weeks' time, possibly as a "package of measures", once it has assessed how the June 23 referendum decision has affected the economy, the world's fifth largest.
"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," the BOE said in minutes of its July meeting which ended on Wednesday.
"The precise size and nature of any stimulatory measures will be determined during the August forecast and inflation report round," it said.
The nine-member Monetary Policy Committee, led by governor Mark Carney, voted 8-1 to keep the benchmark at 0.5 per cent, with only Mr Gertjan Vlieghe saying the outlook justified an immediate reduction.
While policymakers discussed measures that could help the economy, they stopped short of detailing what these might be.
Markit chief economist Chris Williamson said the BOE has opted not to rush into "a knee-jerk reaction" to the Brexit vote. "Policymakers will therefore need to do a lot more to shore up confidence and keep the gears of the economy turning in the coming months," he said.
The surprise decision to keep rates on hold pushed up sterling to a two-week high against the US dollar at US$1.3480 and British government bond yields rose.
Sterling fell more than 13 per cent against the greenback in the days after the vote and trillions of dollars were erased from stock markets. But the quicker-than- expected appointment on Wednesday of Mrs Theresa May as Britain's new Prime Minister helped calm nerves.
Mr Carney was due to meet new Finance Minister Philip Hammond soon. Hours after his appointment, the latter said the government will do what is necessary to restore confidence in the economy and suggested a less aggressive approach to bringing down the budget deficit.
Mr Carney sent a clear signal two weeks ago that stimulus was on the way, in an attempt to show the economy was in safe hands even as Britain's political leadership crumbled after the EU vote.
But Mr Carney also suggested he does not favour a sharp cut in borrowing costs because of the possible impact on banks based in Britain, and said he did not want to follow the example of the European Central Bank and Bank of Japan by cutting rates below zero.
The central bank will publish its quarterly inflation report on Aug 4. It will include new forecasts for growth and inflation and the Monetary Policy Committee's first full take on how the vote is set to affect Britain. Initial reports suggest economic activity is likely to weaken in the near term, the minutes said.