Bank of England (BoE) governor Mark Carney surprised markets today by announcing that despite concerns of a of a Brexit-induced recession, the central bank would maintain interest rates at 0.5%and would not extend the asset purchase programme beyond the current level of £375bn.
The move was backed overwhelmingly by the Monetary Policy Committee- which voted 8-1 against a rate hike and unanimously against an extension of the asset purchase programme.
Commenting on the overall impact of the EU Referendum, the monetary policy committee stated that: “Markets have functioned well, and the improved resilience of the core of the UK financial system and the flexibility of the regulatory framework have allowed the impact of the referendum result to be dampened rather than amplified.”
David Katimbo-Mugwanya, fund manager at EdenTree Investment Management comments on the move: “The market had treated a Bank of England base rate cut as a foregone conclusion, following the dovish commentary in the aftermath of the UK’s vote to leave the EU. Inaction by the Bank of England at this juncture seems to imply it wishes to make a more detailed assessment of the potential shock to economic growth, ahead of announcing any policy measures to mitigate a slowdown. These may well include further Quantitative Easing as early as next month, when the Bank releases new growth and inflation forecasts in its Quarterly Inflation Report. ”
Ahead of the announcement, the GBP appreciated against the USD to $1.323, following the announcement, the GBP increased further to $1.336.
Nevertheless, the BoE Monetary Policy Committee acknowledged that the long-term impact of the Brexit vote remained to be seen and left the door open for further easing measures: “ 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 Committee stated.