The Bank of England has announced that it will hold UK interest rates at 0.5%, despite widespread predictions of a cut after the UK’s vote to leave the EU on June 23.
The Monetary Policy Committee voted 8-1 to leave rates unchanged and made no moves on a quantitative easing programme. However, notes from the meeting suggest that the central bank will act again next month.
Markets had priced in an 80% chance of a rate cut ahead of the decision. The FTSE 100 lost some of its earlier gains in wake of the BoE’s decision.
The committee suggested that near term economic activity is likely to weaken.
In a statement it said: “Markets have functioned well, and the improved resilience of the core of the UK financial system and the flexibility of the regulatory framework has allowed the impact of the referendum result to be dampened rather than amplified.
“Official data on economic activity covering the period since the referendum are not yet available. However, there are preliminary signs that the result has affected sentiment among households and companies, with sharp falls in some measures of business and consumer confidence.
“Early indications from surveys and from contacts of the Bank’s agents suggest that some businesses are beginning to delay investment projects and postpone recruitment decisions. Regarding the housing market, survey data point to a significant weakening in expected activity. Taken together, these indicators suggest economic activity is likely to weaken in the near term.”
Dean Turner, economist at UBS Wealth Management, said:
“The Bank of England stood firm today, surprising markets which had been bracing themselves for a rate cut. But this is not the end of the story. Our view is that the Bank of England will begin the process of lowering rates in August, and potentially discuss other measures such as an extension of the quantitative easing programme. We expect to see a measured approach to cutting rates, with gradual decreases over time. Sterling has bounced on the decision to hold rates.”