The Bank of England left its key interest rate at a record low and signaled it's readying stimulus for August as the economy reels from Britain's decision to quit the European Union.
The nine-member Monetary Policy Committee, led by Governor Mark Carney, voted 8-1 to keep the benchmark at 0.5 percent, with only Gertjan Vlieghe saying the outlook justified an immediate reduction. The decision is likely to shock investors, who had priced in more than an 80 percent chance the rate would be lowered. While policy makers discussed what measures could help the economy, they stopped short of detailing what those might be.
“Most members of the committee expect monetary policy to be loosened in August,” officials said, according to the minutes of their July 13 meeting. “The committee discussed various easing options and combinations thereof. The exact extent of any additional stimulus measures will be based on the committee's updated forecast, and their composition will take account of any interactions with the financial system.”
The central bank is due to publish its quarterly Inflation Report on Aug. 4, which will include new forecasts for growth and inflation and the MPC's first full take on how the referendum outcome is set to affect the U.K. Initial reports suggested economic activity was likely to weaken in the near-term, the minutes said.
With Britain preparing to navigate a split from its biggest trading partner and Carney saying easing was likely to be needed over the summer, 31 of 54 economists in a Bloomberg survey had predicted pre-emptive action. The governor has taken a proactive approach since the referendum, offering additional liquidity operations and relaxing bank rules to encourage lending.
The pound strengthened 1.3 percent to $1.3321 as of 12:15 p.m. London time.
The MPC “had taken some reassurance” from the fact that markets continued to function effectively in the post-Brexit period, saying they dampened, rather than amplified, the impact of the vote. The sharp drop in the pound will also likely put upward pressure on inflation in the short term, the minutes said.
“If you want to calibrate policy to address a situation which you know is going to be weaker, you really need some evidence and forecasts to support that and that's what they're waiting for,” George Buckley, an economist at Deutsche Bank AG in London, said in a telephone call after the announcement. “It gives them time to digest some of the softer news that we will inevitably see in the coming weeks. They had no real evidence on which to base a cut yet. It's a much better idea to wait.”
Initial reports signal the outlook has deteriorated, with retailers reporting their worst June in a decade and a gauge of consumer confidence plunging the most in 21 years.
For Vlieghe, “the subdued economic outlook before the referendum had already come close to warranting further stimulus,” the minutes showed. “The early evidence supported the view that demand was likely to weaken further.”
Bloomberg News
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