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BoE Surprises by Holding Interest Rates at 0.5%, Hints at Easing in August

The Bank of England surprised markets by holding interest rates on Thursday, despite prior guidance from Governor Mark Carney that policy easing could be forthcoming.

Markets had priced in a rate cut of 25 basis points to 0.25 percent, which would have been the first change to the key rate since 2009. This followed financial market turmoil and economic and political uncertainty following to the U.K. public's vote to leave the European Union on June 23.

Governor of the Bank of England Mark Carney delivers his monthly inflation report at the Bank of England in the City of London
Governor of the Bank of England Mark Carney, in the City of London, May 2016. REUTERS/Dylan Martinez

Instead, the bank's Monetary Policy Committee (MPC) voted by a majority of eight-to-one to hold the rate at 0.5 percent and unanimously to make no further additions to its £375 billion ($501.2 billion) quantitative-easing program. The one dissenting member, Gertjan Vlieghe, voted for a 25-basis point cut.

Sterling rose to a two-week high of $1.3480 on the news, while the international focused benchmark FTSE 100 trimmed some of its gains. The domestically focused FTSE 250, which tracks mid-cap companies, gained to trade up 0.4 percent.

Markets were surprised by the decision because two weeks ago, Carney publicly said "some monetary policy easing would likely be required over the summer," following the referendum. He did not specify what form easing might take or when exactly it might occur though.

There were strong hints of easing next month, however.

"In the absence of a further worsening in the trade-off between supporting growth and returning inflation to target on a sustainable basis, most members of the committee expect monetary policy to be loosened in August," the minutes said.

The minutes from the bank's policy-setting meeting on Wednesday provided two possible explanations for the committee's decision to hold rates in July.

Firstly, that financial markets had functioned well in the wake of the Brexit vote, despite the immediate tumult in equities, sterling and euro trade.

"The Committee had taken some reassurance from the evidence that markets had continued to function effectively throughout the period. The overall resilience of the U.K. financial system, and the flexibility of the regulatory framework, had allowed the impact of the referendum results to be dampened rather than amplified," the minutes said.

Secondly, policymakers felt it was too early to make a judgment on the medium-term impact from the vote.

"Few hard data covering the post-referendum period has yet been released and very little survey evidence was available so far … As yet, there has been no survey data released on how, if at all, households and businesses had adjusted their expectations following the result," the minutes said.

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