Bank of England’s monetary policy committee voted to retain U.K. interest rates at 0.5%, despite an expectation of cuts following the U.K.’s decision to exit the European Union.
The committee, which sets monetary policy to meet the bank’s 2% inflation target in a way that sustains growth and employment in the U.K., voted 8-1 to maintain rates. One member voted for a cut to 0.25%.
Interest rate cuts had been expected, particularly following hints late last month by Mark Carney, governor of the Bank of England, that further monetary policy easing would be necessary this summer.
“There are two surprises here,” said Michael Metcalfe, senior managing director and head of global macro strategy at State Street Global Markets, in a news release. “The first is that interest rate markets had forecast more than a 70% chance of a cut. But the bigger surprise is the second one, namely that the Bank of England was ready to disappoint market expectations so soon after the Brexit vote.”
Mr. Metcalfe said a rate cut could still come at the next MPC meeting, but that “the delay hints at concern about the inflationary impact of (pound) sterling weakness and some uncertainty as to how rapidly the economy will actually slow.”
Richard Benson, managing director, co-head portfolio investments, at Millennium Global Investments, said in an e-mail that the bank is “very explicitly pre-announcing an August cut and further easing.” He said stability is the buzzword, citing a lack of rate cut and the U.K.’s new Chancellor of the Exchequer Philip Hammond’s comment that there would not be an emergency budget following the Brexit vote, as examples.
Trevor Greetham, head of multiasset at Royal London Asset Management, said in a news release that the U.K. will “see forceful action from the Bank of England in August,” and that “rising tensions with Europe are also likely to weigh on the pound after what could be a short-lived honeymoon for Prime Minister Theresa May.”
Money managers said the delay to any cuts in interest rates makes sense due to a lack of data from the post-referendum period. “It is too early for the bank to have any meaningful data on how the economy and financial conditions are being affected by the confidence shock ensuing from the EU referendum outcome, and therefore too early to calibrate the appropriate policy response,” said Hetal Mehta, senior European economist at Legal & General Investment Management, in a news release. The firm expects interest rates to be cut by 50 basis points in the coming months, with further measures such as quantitative easing and credit easing.
Freya Hutchings contributed to this story.