Pound jumps on surprise decision
Bank of England keeps interest rates on hold
The 8-1 decision by the monetary policy committee to maintain the base rate at 0.5% will come as a surprise following governor Mark Carney’s hint after the EU referendum that action would be taken to help support the British economy.
Expectations of a cut have helped to drive the stock market, with the FTSE 100 at an 11-month high. It was 0.87% or 55 points higher just ahead of the announcement.
Investors seemed largely unmoved after the announcement at mid-day. Initially the index fell by a few points rising and then closing 15.93 points lower at 6,654.47.
There was a hope that a 0.25% cut would help to bring stability to markets, stimulate borrowing and investment and help build confidence.
However, the Bank said it requires more time to assess the full impact of the Brexit vote before taking action.
Sterling has lost 16% of its value against the Euro since last July but is up 1.29% on the dollar today at $1.33 and 1.5% up on the euro at €1.2.
The decision not to cut rates will also come as a relief to savers who were faced with seeing no gain on their savings.
Rain Newton-Smith, CBI Chief Economist, said: “While the Committee has decided to keep rates on hold, the Governor has signalled that a range of options are being considered to alleviate the economic uncertainty following last month’s Referendum.
“The Bank has indicated that monetary policy may loosen in August, once it has had more time to assess the impact of the Brexit vote on activity.
“Policymakers have several tools at their disposal, and have already taken some measures to pre-emptively ease liquidity bottlenecks and ensure finance continues to flow around the economy.”
Liz Cameron, chief executive of Scottish Chambers of Commerce, said: “Businesses are looking for clear signs of a new strategy for the UK economy in the post-referendum environment but it appears that we may have to wait at least another few weeks until the publication of the Bank of England’s latest inflation report before we discover its vision for the future.”
David Lamb, head of dealing at FEXCO Corporate Paymets, said: “With little hard economic data to back up the dire – but still largely anecdotal – evidence of a post-referendum downturn, the Bank’s ‘wait and see’ approach makes sense.
“If there is a time for the MPC’s grandees to cut rates, it will be in August when they have the Bank’s next Inflation Report in hand and a clearer picture of the impact of the Brexit vote on the UK economy.
“As a result today’s Sterling rally won’t be immediately erased, but the outlook for the Pound remains weak.”
Charles Cowling, director, JLT Employee Benefits, said: “This is a brief respite for pension schemes. The Governor of the Bank of England, Mark Carney, has signalled that he expects to see a rate cut in the summer as a result of Brexit and a worsening outlook for economic growth.
“Indeed, this is largely already priced in to markets which have seen long-term interest rates fall markedly in the last few weeks. This has caused pension scheme deficits to rise significantly as a result.
“Trustees who were hoping or expecting interest rates to rise and have, so far, been reluctant to reduce or remove exposure to interest rate risk in their pension scheme, through Liability Driven Investment or other means, are faced with the dilemma of whether to act now that prices have moved even further against them.
“Alternatively, they could stay in the investment casino and hope that markets are wrong and interest rates rise soon? For pension schemes with 2016 actuarial valuations, there are going to be some difficult negotiations as bigger pension deficits are inevitably going to result in trustee demands for hikes in employer contributions.”
Miles Gibson, head of UK Research, CBRE, said: “Following the referendum result, the Bank of England had already made reassuring noises to the market, so the MPC may have felt nothing more was required for now, especially given the stimulus effect of a devalued currency.
“It is likely that the Bank wants to wait for more hard data on how the economy is performing before taking action.
“From a commercial property perspective, if and when a base rate cut does come, it will not have any big impact on pricing, which is driven by long term rates, although pricing might be boosted by a confidence effect. With sterling priced assets still looking attractive to overseas investors, whose cost of capital is not driven by UK debt markets, London and the UK most definitely remain a strong investment opportunity.”
Calum Bennie, savings expert at Scottish Friendly, said: “The decision by the Bank of England Monetary Policy Committee not to cut the base interest rate beyond its already historic low will come as scant relief for cash savers.
“Savers have been waiting patiently for rates to go up and as the UK economy improved all signs were that Carney and co were creeping towards an increase in the not too distant future. However, with the economic uncertainty unleashed around Brexit, all such bets are now off. The UK is on a rollercoaster of a ride for the foreseeable future.
“Rates for cash savers are now clearly set to be in the doldrums for the long term.”