Interest Rates revisited

Tony Ward

July 18, 2016

Tony Ward is chief executive of Clayton Euro Risk

I, for one, was pleased last week to see that the Bank of England chose to hold bank base rate at 0.5% despite speculation that it would cut it.

The Monetary Policy Committee (MPC) voted 8–1 to leave rates unchanged, albeit the minutes of the meeting showed most members expect the Bank to take some action next month. Most analysts, of course, thought that a rate rise was a foregone conclusion with financial markets pricing in an 80% chance of the Bank cutting rates.

So it looks like the Bank has taken the watch-and-wait approach, which is a wise course of action. The Bank has only half a percentage point – or as I put it in a previous blog, ‘two bullets left in the gun – with which to play. Will a rate cut in isolation make such a difference?

While the Bank said that some businesses were delaying investment projects and recruitment decisions, and that it expected ‘sizeable falls’ in commercial real estate prices in the short term, the MPC actually raised its expectation for economic growth in the three months to June to 0.5% from 0.3%.

Aberdeen Asset Management economist Paul Diggle said the Bank had concluded that patience was a virtue.

“The next meeting is only three weeks away, and by then Carney and his colleagues will have a few extra post-referendum data points to digest, as well as a new set of forecasts,” he said, indicating that a decision could be made once the impact of Brexit became clearer.

David Smith, Economics Editor at The Sunday Times, is also in agreement, suggesting that the decision to leave rates on hold this month ‘was a sensible one’. He indicated that the MPC would want to ‘have a new, fully worked forecast before deciding its course of action and will have that in three weeks time’.

So let’s wait and see. Mark Carney said: “It’s extremely important that any monetary action is well aimed, that it focuses on the domestic economy and it takes into account potentially unintended or counterproductive consequences in the financial sector.”

The Bank has confirmed that the August stimulus will be a package of measures. It may or may not include a cut in rates but I’m hoping for some real innovation.

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