The Bank of England Monetary Policy Committee has decided to hold interest rates at 0.5%. Sterling rallied on the news – as it had been widely expected the Bank would cut rates to 0.25%.
Two weeks ago, Bank of England governor Mark Carney delivered a speech to business leaders in London hinting that there could be an interest rate cut this summer, an about-turn from expectations earlier in the year that the UK would raise rates in 2016.
Carney said that uncertainty over the scale of the changes following the Brexit vote “could weigh on our economic prospects for some time”, but that the Bank would not “shirk from its obligations, and we will not hesitate to take any additional measures required to meet our responsibilities as the United Kingdom moves forward.
Subsequently going into this morning the market was pricing in a 77% chance of an interest rate cut to either 0.25% or even to 0%.
Michael Metcalfe, Head of Global Macro Strategy, State Street Global Markets said that he was surprised the Bank of England was “ready to disappoint market expectations so soon after the Brexit vote”.
“While a rate cut can still come at the next meeting, the delay hints at concern about the inflationary impact of sterling weakness and some uncertainty as to how rapidly the economy will actually slow,” he added.
Ben Brettell, Senior Economist, Hargreaves Lansdown said that the FTSE had born the brunt of the news, dropping 60 points in disappointment.
“Mark Carney had seemingly backed himself into a corner with his speech in the immediate aftermath of the referendum. So strong were his hints that looser monetary policy was on the way, that the market had come to fully expect a 25 basis point cut today,” he said.
Although the markets have reacted negatively to the news, arguably the Bank has taken the most sensible approach – a wait and see strategy. It is too early to have any definitive data on how Brexit has effected the economy and by the meeting the Committee will be able to have a better measure of the economic impact of Britain voting to leave the European Union.
Chris Towner, chief economist at HiFX comments: “The next Bank of England meeting is in August and this fits in with the quarterly inflation report and will allow the members a little more time to come to an informed decision rather that a gut reaction.”
What Does it Mean for Savers?
Anna Bowes, director at SavingsChampion.co.uk said that savers will understandably breathe a sigh of relief at the news – but should not rest on their laurels.
“We would argue that providers no longer need a change to the base rate, to cut savings rates. Since Funding for Lending was introduced in 2012 we've seen nearly 4,700 cuts to existing savings accounts, although the base rate has remained at 0.50% since 2009,” she said.
“Savers really have been the sacrificial lambs of this downturn. Keeping your cash on the move is a must to improve your returns; don't let inertia get the better of you and eat away at your interest."
