The Bank of England’s monetary policy committee (MPC) voted 8-1 to keep interest rates unchanged at their record low of 0.5%. Its newest member, Gertjan Vlieghe, backed an immediate quarter point cut but the rest preferred to wait until August, when the Bank is due to release its latest growth and inflation forecasts. This is what economists made of the decision.
Samuel Tombs, chief UK economist, Pantheon Macroeconomics
The committee ‘discussed various easing options and combinations thereof’, suggesting that a Bank rate cut might be supplemented by more QE. While we continue to expect interest rates to be cut to 0.25% next month, we doubt that the MPC will go further.
The case for QE in August will be undermined by the committee’s new inflation forecast, which likely will show a surge in import prices driving inflation above target, perhaps hitting 3% late next year. Since inflation has spent 68% of the last decade above the 2% target, substantial easing would cast doubt on the strength of the MPC’s commitment to its target.
In addition, the new chancellor has signalled that fiscal tightening will be scaled back and will be less intense than when the committee has undertaken QE previously. Finally, the Bank of England already has actively intervened to support the economy, by reducing banks’ capital requirements and providing them with virtually unlimited short-term liquidity.
Andrew Sentance, senior economic adviser, PricewaterhouseCoopers
The MPC has taken a very sensible decision to keep interest rates on hold. Though political events have been fast moving, there is a need for stable economic policy until we are clearer how the economy is performing in the wake of the EU referendum result. That will not be clear until the autumn, and the MPC should hold fire until then. The MPC still won’t have enough information in August to make a proper assessment of the post-Brexit economic situation.
Looking further ahead, the MPC needs to recognise that interest rates are already extremely low and have been for seven years. So there is very little that monetary policy can now do to support the economy. We need to look to fiscal policy – government spending and tax measures – and supply-side policies, which aim to make the UK a more attractive environment for business activity, to offset the shock of the Brexit decision.
Fabrice Montagné and Andrzej Szczepaniak, Barclays
The committee remained consistent with its announced two-step strategy of an initial assessment in July, followed by a ‘fuller’ assessment in August as well as likely policy easing ‘over the summer’.
What has changed, however, is the split of the vote for the Bank rate decision. Against our expectations, only one member dissented (Gertjan Vlieghe) and voted for a cut in the Bank rate.
Alan Clarke, UK and eurozone economist, Scotiabank
The return of the unreliable boyfriend:
If ever there was a case for abandoning forward guidance and central bankers keeping quiet, this meeting is it. Virtually nobody was going for a rate cut at this meeting before Carney’s intervention a couple of weeks ago. Most assumed that the weakness of the pound and the need to wait for incoming data would lead to a pause at least until August. But for no apparent reason, governor Carney decided to tease the market, let it price in a high probability of a rate cut, only to disappoint. As if the situation wasn’t volatile and uncertain enough, the BoE governor poured petrol on the flames. This was a completely unnecessary intervention.
The governor may well argue that the point of forward guidance is for households and businesses and not just financial markets and that the latter should know better. But quite frankly, the governor should know better; he should know that the markets are super-sensitive to BoE communications.
The majority of members judged that loosening would be appropriate in August. Why wait?!? They also discussed what form that might take, hence the combination of a rate cut and unconventional policy easing seems likely.
Hetal Mehta, senior European economist, Legal & General Investment Management
We expected that the Bank of England would hold rates for the time being. We believe it is too early for the Bank to have any meaningful data on how the economy and financial conditions are being affected by the confidence shock ensuing from the EU referendum outcome, and therefore too early to calibrate the appropriate policy response.
We expect the Bank of England will make a more comprehensive assessment in August, and that in the coming months interest rates will be cut by 50bps and further measures such as QE and credit easing will be announced.
Dean Turner, economist, UBS Wealth Management
The Bank of England stood firm today, surprising markets which had been bracing themselves for a rate cut. But this is not the end of the story. Our view is that the Bank of England will begin the process of lowering rates in August, and potentially discuss other measures such as an extension of the quantitative easing programme. We expect to see a measured approach to cutting rates, with gradual decreases over time. Sterling has bounced on the decision to hold rates.
Frances O’Grady, general secretary, TUC
The Bank of England has pointed out some worrying signs that the vote to leave the European Union is beginning to affect jobs and investment – and has been clear about its determination to support the economy in this period.
Theresa May’s new government must now take decisive action to make sure that workers do not pay the price for the decision to leave the European Union.
That means investing in our infrastructure as the TUC set out in our plan of action to keep the UK economy moving. We need the third runway at Heathrow to be given the go ahead, renewed support for HS2 and plans for more high-speed rail, and a major expansion in housebuilding brought forward as a matter of urgency.
Michael Martins, economist, Institute of Directors
The Bank of England is playing wait and see for the moment. While the governor has been clear since the Brexit vote that he is poised to act if necessary, it looks like they are waiting to get more data on what is happening in the real economy before making a decision. Next week’s official data releases on the public sector finances, inflation, and labour market, which collectively cover the time immediately before and after the referendum, should help them make up their minds before next month’s meeting of the monetary policy committee.
The minutes of the MPC meeting refer to ‘preliminary signs that the result has affected sentiment among households and companies,’ with ‘indications from surveys … that some businesses are beginning to delay investment projects and postpone recruitment decisions’. One of the first surveys was conducted by the IoD immediately after the vote, which showed that a third of members (32%) say hiring will continue at the same pace, but a quarter (24%) will put a freeze on recruitment, and 5% will make redundancies.
