Bank of England votes 8-1 to keep interest rates on hold

The Bank of England kept interest rates unchanged on Thursday to the surprise of many economists who had expected a 25 basis point cut to address post-Brexit risks.

The BoE voted 8-1 to leave rates at 0.50% as the appointment of Theresa May as Prime Minister brought a semblance of economic stability in the fallout following the Brexit vote. All Monetary Policy Committee members agreed to maintain the quantitative easing programme at £375bn, as expected, with Gertjan Vlieghe the only dissenting vote against standing pat on rates.

However, the BoE said it expects to boost stimulus measures at the August policy meeting once new economic forecasts are available.

"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 Bank said in a policy statement.

The pound jumped 1.73% against the dollar to $1.3374 following the announcement and a similar level against the euro back above €1.2.

Prior to the Bank’s policy decision, Governor Mark Carney had suggested the BoE would need to enact further monetary easing over the summer given the weaker economic outlook following the 24 June European Union referendum. Many analysts expected the BoE would slash rates to cushion the blow of the Brexit vote.

“The Bank of England faced its biggest interest rate decision since the aftermath of the 2008 financial crisis today, and its decision against cutting the rate for the first time in more than seven years shows that Mark Carney and Co. believe the storm can be weathered in the short term," said Dennis de Jong, managing director at UFX.com.

“However, the unprecedented uncertainty means we could still see radical steps taken in the coming weeks to ward of a Brexit-induced recession. Nothing is off the table and economists are already whispering about the possibility of the first quantitative easing since 2012 and even a zero percent interest rate in August. Desperate times call for desperate measures.”

In its monetary policy statement, the BoE recognised that financial markets had reacted sharply to the UK's decision to exit the EU with the sterling's effective exchange rate falling 6% since the last MPC meeting. However, the Bank said the UK market proved resilient.

The MPC added that official data on economic activity covering the period since the EU referendum were not yet available.

"The Committee will consider over the coming period how the outlook for the economy has changed in light of the referendum result and will publish its new forecast in its forthcoming Inflation Report on 4 August."

Chris Williamson, chief economist at Markit, said: “When it comes to stimulating growth, the worry is that lowering the cost of credit will prove ineffectual absent an associated increase in demand for borrowing by households and companies.

"Demand for loans relies to a large extent on confidence in the economic outlook, which currently remains highly uncertain. A composite gauge of economic uncertainty, which pulls together various measures of financial market, real economy and sentiment indicators has risen to its highest since 2011."

Williamson said policymakers will therefore need to do much more to shore up confidence and keep economic growth afloat in the coming months.

"In the lead up to the Bank’s August meeting, the focus shifts to the new government’s ‘Brexit’ plans and any potential fiscal boost the economy to get further clarity on the economic outlook.”