Bank of England surprises markets by keeping rates on hold, signals August move

The Bank of England surprised many investors by keeping its interest rates unchanged on July 14, 2016.
The Bank of England surprised many investors by keeping its interest rates unchanged on July 14, 2016.PHOTO: REUTERS

LONDON (REUTERS) - The Bank of England kept interest rates unchanged on Thursday, wrong-footing many investors who had expected the first cut in more than seven years as Britain's economy reels from last month's Brexit vote.

The Bank 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 to leave the European Union has affected the economy.

"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 Bank 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.

Most economists taking part in a Reuters poll had expected the central bank to halve its Bank Rate to 0.25 per cent in order to cushion the economy from the shock of the Brexit vote.

Sterling plunged more than 13 per cent against the dollar in the days after the vote and trillions of dollars were wiped off stock markets globally.

However, the quicker-than-expected appointment on Wednesday of Theresa May as Britain's new prime minister has helped settle nerves in financial markets.

BoE Governor Mark Carney was due to meet Britain's new finance minister Philip Hammond on Thursday. Hours after his appointment, Hammond said the government would do whatever was 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 over the summer in an attempt to show the economy was in safe hands as the country's political leadership crumbled after the EU vote.

But Mr Carney has also suggested he does not favour a sharp cut in borrowing costs because of the possible impact on banks based in Britain, and he has said he did not want to follow the example of the European Central Bank and the Bank of Japan by cutting rates below zero.

In the minutes published on Thursday, the Bank said the composition of any additional stimulus measures "would take into account any interactions with the financial system". It also said the extent of any further stimulus measures would be based on its updated forecasts.