MPC votes 9-0 to keep policy unchanged, cautions on Brexit impact

Rate-setters at the Bank of England kept their main policy settings unchanged by a unanimous vote, but the minutes of their meeting revealed that they had grown more concerned about the impact which a vote to leave the European Union might have.

The members of the Monetary Policy Committee voted by 9-0 to keep Bank Rate at 0.50% and the size of the asset purchase facility at £375bn, all as expected.

In its policy statement, the MPC said it "intends to set monetary policy to ensure that growth is sufficient to return inflation to the target in around two years and keep it there in the absence of further shocks."

However, the MPC also noted "increased uncertainty" ahead of the EU referendum was starting to weigh on certain areas of activity, with some economic decisions - such as on on capital expenditure and commercial property transactions- having been postponed until afterwards.

The 23 June referendum on EU membership would also make it more difficult to interpret developments in economic and financial markets over the coming months. Hence, policymakers said they would move more cautiously ahead of the referendum.

A vote to leave the EU “might result in a period of uncertainty about the economic outlook” and “this uncertainty would be likely to push down on demand in the short run” it said.

"In the case of a Brexit, monetary policy will become a lot more complicated for the BoE"

“A vote to leave could have significant implications for asset prices, in particular the exchange rate,” the minutes read.

"The MPC also noted that there continued to be a range of views among members about the outlook for activity and inflation, and the associated risks,” Dr. Howard Archer, chief European+UK economist at IHS Economics pointed out in a research note sent to clients.

"Should the UK vote to leave the EU in June’s referendum, monetary policy will become a lot more complicated for the Bank of England. Sterling would be likely to fall sharply, with inflationary implications. However, it is also likely that heightened uncertainty would weigh down markedly on economic activity, especially on business investment, and likely also on consumer spending. The weaker pound though would be supportive to exports," Dr. Archer added.

Unbalanced economic growth profile

On 31 March, the Office for National Statistics revised its estimate for the rate of growth in gross domestic product for the fourth quarter of 2015 to a quarterly pace of 0.6% (2.1% year-on-year), versus a preliminary print of 0.5% (1.9% year-on-year).

In a research note sent to clients that same day, Capital Economics noted the “very unbalanced” nature of the economy’s growth profile.

GDP growth during that quarter was reliant on household and government spending, alongside a strong contribution from residential investment, the think-tank said.

Activity indicators at the time were suggesting growth slowed at the beginning of 2016, with the uncertainty surrounding a possible ‘Brexit’ and a renewed fiscal squeeze weighing on demand.

Yet while growth was set to slow in 2016 to below the previous year’s pace, Capital Economics was “optimistic” that a pick-up in productivity growth would a stronger recovery later on as those factors holding back demand waned.

Rate cuts ahead?

Prior to Thursday's announcement, one report had suggested that two members of the Monetary Policy Committee were considering voting for a cut to Bank Rate.

Nevertheless, referencing the content of the minutes, Scott Bowman, UK economist at Capital Economics, said: "a rate cut does not appear to be on the cards either, despite market pricing implying this. Indeed, the MPC thinks that Bank Rate will need to increase over the forecast period, although at a rate that will by slower than past tightening cycles."

"We are doubtful that the Bank of England will relax monetary policy [but] we do not see the Bank of England raising interest rates from 0.50% to 0.75% until May 2017," Dr.Archer said.

As of 12:02 BST cable was trading -0.37% to 1.4152 versus 1.4143 just minutes before the release of the meeting minutes and the policy announcement.