Bank of England Gauges Brexit Tactics as Rate Seen Kept at 0.25%

Updated on
  • Rebound in sentiment gauges may weigh on rate-cut appetite
  • Policy makers to publish latest decision at noon in London

BOE Holds Key Rate Steady at 0.25% in 9-0 Vote

Six weeks after the Bank of England delivered a stronger response to Brexit than many economists forecast, policy makers are having to assess whether the outlook warrants a change of strategy.

QuickTake Brexit

So far, data on the economy’s performance since the U.K.’s vote to quit the European Union has been better than expected. Sentiment-based indicators, including a gauge of services and manufacturing and a measure of household confidence, have bounced back after plummeting in July.

While official figures covering the period after the vote have been sparse, those published so far -- including trade, wages and unemployment -- are far from apocalyptic. Data published by the statistics office on Thursday showed retail sales declined less than economists forecast in August.

What matters most for policy is the evolution relative to the projections the central bank made in August. While the majority of the nine-member Monetary Policy Committee said they saw scope for another rate reduction this year should things evolve in line with their expectations, Carney last week acknowledged the upside risks to the forecast for 0.1 percent in growth in the third quarter and several external forecasters have bumped up their projections for next year.

Traders are almost certain the key rate will be kept at 0.25 percent on Thursday, and have trimmed their expectations for another reduction before the end of the year. All economists surveyed by Bloomberg predict the benchmark will be unchanged and the asset-purchase target will be maintained at 435 billion pounds ($573 billion)

While the pound’s 11 percent drop against the dollar since the June 23 referendum looks set to push up inflation, BOE officials have signaled a willingness to look through the currency effect.

Still, officials have been quick to point out that without the currency effect, price pressures remain muted. Even Kristin Forbes, who cited a potential overshoot of the BOE’s target as one of her reasons for opposing parts of the August stimulus package, told lawmakers last week that domestically generated pressures were “moderate.” That was borne out in data released Wednesday showing wage growth excluding bonuses was the weakest this year in the three months through July.

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— With assistance by Jill Ward

(Updates with retail sales numbers in second paragraph.)
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