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Bank of England opts against rate cut – Despite clear evidence of economic damage

LONDON: Pedestrians walk past the Bank of England (BOE) in the City of London. — AFP
LONDON: Pedestrians walk past the Bank of England (BOE) in the City of London. — AFP

LONDON: The Bank of England surprised financial markets by opting against a cut in interest rates yesterday, despite clear evidence of the initial economic damage caused by the country’s vote last month to leave the European Union. The bank said it was too soon to know the full impact of the Brexit vote – even though the housing market already shows signs of struggling and business confidence has plummeted. However, it did signal that it could cut rates at its meeting in early August after receiving additional data on how the economy is faring in the wake of the June 23 referendum.

The recently battered British pound, which fell to a 31-year low against the dollar in the aftermath of the vote, rallied following the bank’s announcement. The pound was up 1.4 percent at $1.3308 and 1.5 percent firmer at 1.20 Euros. Bank of England Gov Mark Carney and seven other policymakers at the central bank chose to keep policy on hold on Thursday, including maintaining the benchmark rate – so-called Bank Rate – at 0.5 percent. Only Gertjan Vlieghe voted to reduce it a quarter of a percentage point to 0.25 percent.

Heading for recession
Most economists had expected a cut to shore up the British economy, which policymakers conceded has already taken a hit. Many economists think Britain could now be heading for a recession later this year as the uncertainty over the country’s future dents household spending and business investment. In the statement accompanying its decision, the rate-setting committee noted there were early indications that firms were delaying investment projects and postponing recruitment, and that the housing market has weakened. “Taken together, these indicators suggest economic activity is likely to weaken in the near term,” the bank said. But the bank said it was too early to know for certain.

“Most members of the committee expect monetary policy to be loosened in August,” the bank said. “The precise size and nature of any stimulatory measures will be determined during the August forecast and Inflation Report.” The decision to hold fire comes after weeks of political uncertainty that has unnerved investors in global markets and clouded Britain’s economic outlook. Some of that uncertainty ended on Wednesday when Theresa May became Britain’s new prime minister. One of her first acts was to appoint Philip Hammond as the country’s new Treasury chief. Hammond tried to sound a reassuring note, pledging that he would not introduce an emergency national budget. “Britain is open for business,” Hammond told Sky News. “We are not turning our back on the world.” Hammond was due to meet Carney on Thursday to “assess where we are.”

Asset-purchase program

As well as keeping borrowing rates unchanged, the committee also chose to keep its asset-purchase program unchanged at 375 billion pounds ($500 billion). Bank policymakers hinted at an expansion of that program, which is designed to keep market interest rates low and encourage financial institutions to lend, is possible ahead of their next decision on August 4. “The committee discussed various easing options and combinations thereof,” the bank said in a statement.

Many in the markets had been anticipating a stimulus of some sort at Thursday’s meeting after recent comments from Carney. He had warned of trouble before the vote and said recently that the negative impacts of the EU exit vote had begun to crystallize. A plunge in consumer confidence as measured by market research firm GfK and evidence of markedly reduced business sentiment offered the backdrop for action sooner rather than later. And home sales plummeted in June, according to a report released Thursday by the Royal Institute of Chartered Surveyors.

According to Aberdeen Asset Management Economist Paul Diggle, Carney and his peers on the MPC appear to be biding their time. “The Bank of England has decided that patience is a virtue,” he said. But others say that the decision to hold off might only compound the confusion. “The lack of clear direction is more likely to add to economic uncertainty and therefore be detrimental to demand and the economy,” said Angus Armstrong, the director of macroeconomics at the National Institute of Economic and Social Research. – AP

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