PA ANALYSIS: A Bank of England U–turn?

Added 14th July 2016

The Bank of England has chosen to keep its powder dry by backing off from the interest rate cut that had been hinted at, but is this a U-turn or just minor detour?

PA ANALYSIS: A Bank of England U–turn?

In the wake of the referendum result, Governor Mark Carney had indicated the central bank was poised to stimulate the economy by cutting rates, but the monetary policy committee has decided to hold the base rate at 0.5%.

Due to the earlier rhetoric, the decision announced on Thursday surprised many, with consensus forecasts being a 25bps cut.   

Markets have largely taken the decision in their stride though. The FTSE 100 fell sharply in the minutes after the announcement but by the end of the day it was virtually where it started the session. Sister index the FTSE 250 actually finished the day a fraction up. Sterling was lifted by the decision naturally, putting on 1.5%.

It may be that Carney was always looking towards August rather than July when he talked of possible action. He did after all refer to ‘summer’ in his remarks.

It should also be kept in mind that it has only been three weeks since the referendum, and the dust is very much still settling. A new government has been installed much quicker than pretty much everyone thought, including Carney and his colleagues in all likelihood.

"A new government has been installed much quicker than pretty much everyone thought, including Carney and his colleagues in all likelihood"

Precious little evidence of how the UK economy has really been effected by the referendum result has emerged at this stage. It could prove a very wise move for the Bank of England to keep some cards up the sleeve. 

Another factor in this is the possibility Carney was not referring to an interest rate cut specifically in his earlier comments. The Bank could of course pull the quantitative easing lever again instead.

Andrew Wilson, CEO of Goldman Sachs Asset Management for EMEA sees today’s decision as a result of the low amount of data generated by the UK economy in such a short time since the Brexit vote.

“As the MPC has signalled, the Bank will cut rates, but it was always a close call as to whether it would move today,” he said. “There isn’t a great deal of hard data from the post-referendum period, so it makes sense to wait until the August meeting, which is unusually close to today’s. We definitely expect a move then.”

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About Author

Alex Sebastian

News editor

Alex joined Portfolio Adviser in April 2014 and has been a financial journalist since 2008. He has previously held editorial positions at the Financial Times Group and Euromoney Institutional Investor. Alex is NCTJ qualified and has a degree in economics from the University of Sussex.



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