The Bank of England has held interest rates at 0.5%, confounding City analysts who expected a recent collapse in business and consumer confidence to convince policymakers to support the economy and cut the cost of credit.
By an 8-1 vote, the Bank’s monetary policy committee also refused to contain the economic fallout from the Brexit vote by expanding its £375bn quantitative easing scheme.
However, the Bank put households on notice that a rate cut was certain if the economic situation failed to improve over the next month. In the minutes of its July meeting, the MPC said that without a return to more normal conditions “most members of the committee expect monetary policy to be loosened in August”.
The Bank warned that it expects “sizable falls” in commercial property values in the coming months and also revised down the outlook for house prices.
The pound jumped 2 cents against the dollar to $1.334 and rose 1.5c to €1.20. The FTSE lost some early gains but remained up on the day, ahead 24pts, or 0.4% at 6697.
The lack of action by the Bank is likely to disappoint the new chancellor, Philip Hammond, who is seeking to stabilise confidence in the British economy following the vote to quit the EU.
But the committee made it clear that it wanted to wait until the economic upheaval caused by the Brexit vote has cleared before taking a decision to cut rates, with only Gertjan Vlieghe, an external member known for his dovish views, voting in favour of further easing by a quarter of a percentage point.
Mark Carney, the Bank’s governor, had already signalled that Threadneedle Street stood ready to unlock fresh stimulus following the Brexit vote, which the Bank believes will trigger an economic slowdown.
Speaking a week after the shock Brexit vote, the governor said his personal view was “the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer”.
Many City analysts said there was enough evidence of a sharp deterioration in the outlook for the economy for the MPC to cut rates.
The MPC said it recognised that business and consumer confidence had fallen steeply before and after the vote while housebuyers had delayed purchases, especially in London and the south-east. Members of the committee also recognised that business investment declined in the two quarters ahead of the vote and the jobs market had also shown signs of weakening, with most employers saying they planned to freeze hiring or cut jobs over the next 12 months.
But they said these factors could prove temporary and improve over the coming weeks as the fog of the recent Brexit vote turmoil began to clear.
It said: “In terms of the broader activity outlook, much would depend on the degree and timing of any further retrenchment in business investment, and the flow through to households via the labour market. Both of these were likely to take some time to gauge.”
Nevertheless, a rate cut was still on the horizon, the minutes said. “In the absence of a further worsening in the tradeoff 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.”
