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BoE keeps rates on hold and hints for move in August

Published 14/07/2016, 12:02
Updated 14/07/2016, 12:37
© Reuters.  BoE unexpectedly leaves rates unchanged, sterling extends gains

© Reuters. BoE unexpectedly leaves rates unchanged, sterling extends gains

Investing.com – Despite market expectations for a rate cut, the Bank of England (BoE) decided to leave rates unchanged at a record low and hinted that a move for more stimulation could possibly come in August.

The BoE said it was holding the benchmark interest rate at 0.50%. The rate has been held at that record-low level since March 2009.

Out of the nine Monetary Policy Committee (MPC) members that decide on the price of money, only Gertjan Vlieghe voted to cut the rate by 25 basis points, while the remaining eight decided to leave it unchanged.

The central bank also said it was to maintain the stock of asset purchases financed by the issuance of central bank reserves at £375 billion.

According to the minutes, committee members made initial assessments of the impact of the vote to leave the European Union on demand, supply and the exchange rate.

“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 document showed.

“The precise size and nature of any stimulatory measures will be determined during the August forecast and Inflation Report round,” it said.

The BoE noted that the markets had functioned well in the wake of the U.K.’s decision to exit the European Union (EU), but explained that “official data on economic activity covering the period since the referendum are not yet available.”

Still, the British central bank pointed to preliminary signs that the outcome had affected sentiment among households and companies with sharp falls in some measures of business and consumer confidence.

“Early indications from surveys and from contacts of the Bank’s Agents suggest that some businesses are beginning to delay investment projects and postpone recruitment decisions,” the minutes revealed, while also noting a “significant weakening” in expected activity in the housing market.

“Taken together, these indicators suggest economic activity is likely to weaken in the near term,” the BoE concluded.

With regard to price stability, the BoE pointed out that the “shortfall in headline inflation is due predominantly to unusually large drags from energy and food prices, which are expected to attenuate over the next year.”

“In addition, the sharp fall in the exchange rate will, in the short run, put upward pressure on inflation as the prices of internationally traded commodities increase in sterling terms, and as importers pass on increases in their costs to domestic prices,” the bank explained.

The MPC concluded the minutes by stating that it was committed to taking whatever action is needed to support growth and to return inflation to the target over an appropriate horizon.

“To that end, most members of the Committee expect monetary policy to be loosened in August,” it said, adding that the MPC 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 minutes explained.

Following the news the pound extended gains. GBP/USD was trading at 1.3367 from around 1.3230 ahead of the announcement, while EUR/GBP was at 0.8305 from 0.8392 earlier.

Meanwhile, European stock markets pared gains while London’s FTSE 100 turned negative, slipping 0.08%. The Euro Stoxx 50 increased 0.40%, France's CAC 40 advanced 0.45%, while Germany's DAX gained 0.73%.

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