Published: Thu, July 14, 2016
Economy | By Melissa Porter

Bank of England opts against interest rate cut despite Brexit vote

Simon Checkley, managing director of Private Finance, said it welcomed the MPC's decision and anticipated the committee will cut rates by as much as 50 bps in August.

Experts think it is unlikely the Bank will cut rates below zero, with Bell saying the BoE will be "reluctant to take interest rates into negative territory" because of the impact it would have on banks. "Hence expect lower rates and a lower GBP, back towards 1.3050". He said that was having a "chilling effect" on the economy.

They will wait until the Bank's quarterly forecasts on August 4 before taking further action and deciding on "various possible packages of measures".

This followed financial market turmoil and economic and political uncertainty following to the United Kingdom public's vote to leave the European Union on June 23.

The bank will re-start its asset purchases later this year - probably in August - topping up the £375bn programme it wound up in 2012 with another £50bn, the poll found. However, a rally could be seen as a good opportunity for traders who missed shorting the currency when it dropped by more than 2000 pips post the Brexit vote, as more turmoil is expected to come. "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".

Members of the Bank's Monetary Policy Committee voted by 8-1 to maintain interest rates at the current level of 0.5%, with Gertjan Vlieghe voting for a cut in the Bank Rate to 0.25%. The Bank of England left interest rates unchanged at 0.5% Thursday.

"Official data on economic activity covering the period since the referendum are not yet available", the BoE said in a statement.

Banks and wholesale money markets were also holding up well, added the Bank. "The question is how we negotiate with the European Union, not from the point of view of being members but from the point of view of being close neighbours and trade partners", he said.

The Monetary Policy Committee's minutes stated, "Regarding the housing market, a preview of the June [housing market] survey had pointed to a marked weakening in expected activity and prices following the referendum result".

"Lenders are already factoring a rate cut into their pricing, with Santander increasing the premiums over base rate on some new products to protect its margins in readiness of a rate cut".

But the Bank said weakened property markets and recent figures suggesting consumer and business confidence had plunged in the wake of the Brexit vote fuelled its fears that risks from the Brexit vote had begun to "crystallise".

Chris Williamson, chief economist at Markit, said the Bank had chosen against a "knee-jerk reaction" to the "Brexit" vote but that the deterioration in the United Kingdom economy meant easing in August was needed.

It also said it expected "sizeable falls" in commercial real estate prices in the short term.

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