Bank of England Signals August Stimulus as Rate Kept at 0.5%

  • Officials discussed various easing options at policy meeting
  • Gertjan Vlieghe said outlook justified immediate 25bps cut

BOE Holds Rate at 0.5%, Signals August Stimulus

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 pound surged as the decision surprised 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.

rate-0.5

“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.”

Weaker Outlook

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 as much as 2.5 percent against the dollar before paring gains. It was trading at $1.3324 as of 1:59 p.m. London time. While that’s up 1.4 percent from Wednesday, it’s still down more than 10 percent since the referendum.

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.

‘Time to Digest’

“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, chief U.K. 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.”

While officials didn’t give any further details on what they may do, Carney has previously said they can cut the key rate toward zero and increase asset purchases, including widening the range of securities bought. He’s also said they could shorten the horizon over which they wanted to return inflation to target, creating the expectation of more aggressive action.

Former Chancellor of the Exchequer George Osborne said earlier this month that the Treasury was ready to support the BOE’s Funding for Lending Scheme, which guarantees banks cheap finance in exchange for expanding credit. Carney met with newly appointed Chancellor Philip Hammond earlier Thursday.

While 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, there is little official economic data to show the impact of the Brexit vote. The appointment of Theresa May as prime minister on Wednesday has helped to lift some of the uncertainty gripping markets and households.

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.”

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE