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Bank of England Holds Key Interest Rate Steady Despite Uncertainty Over ‘Brexit’ Bank of England Holds Key Interest Rate Steady Despite Uncertainty Over ‘Brexit’
(about 3 hours later)
LONDON — Despite the widespread uncertainty created by Britain’s vote last month to leave the European Union, the country’s central bank decided to hold its main interest rate steady, although it signaled that a potential cut could come next month in a bid to bolster the economy. LONDON — Despite the widespread uncertainty created by Britain’s vote last month to leave the European Union, the country’s central bank decided to hold its main interest rate steady, although it signaled that economic pressures could necessitate a cut next month.
The decision to leave the 28-nation bloc, known as Brexit, has clouded the growth outlook for Britain, which emerged as one of the region’s strongest economies after the global financial crisis. Now, everything is in flux, with the vote forcing a reassessment of Britain’s trading relationship with the Continent, the status of its critically important financial services industry and the future of London as a regional commercial hub.The decision to leave the 28-nation bloc, known as Brexit, has clouded the growth outlook for Britain, which emerged as one of the region’s strongest economies after the global financial crisis. Now, everything is in flux, with the vote forcing a reassessment of Britain’s trading relationship with the Continent, the status of its critically important financial services industry and the future of London as a regional commercial hub.
The uncertainty has rattled the financial markets. In the aftermath of the referendum, the pound plunged to 31-year lows, as investors have sought havens. Several real estate funds suspended withdrawals as panicked investors have tried to pull their cash. Banking, construction and other stocks in Britain have been hit hard. The uncertainty has rattled the financial markets. In the aftermath of the referendum, the pound plunged to 31-year lows, as investors have sought havens. Several real estate funds suspended withdrawals as panicked investors tried to pull their cash. Banking, construction and other stocks in Britain have been hit hard.
Mark J. Carney, the governor of the Bank of England, has cited the continuing uncertainty as a major drag on the economy, creating tighter financial conditions with potential repercussions around the region. Two weeks ago, he said the “the economic outlook has deteriorated.” Mark J. Carney, the governor of the Bank of England, has cited the continuing uncertainty as a major drag on the economy, creating tighter financial conditions with potential repercussions around the region. Two weeks ago, he said the “the economic outlook has deteriorated” and a rate cut this summer was likely.
The issue of uncertainty was echoed by the new chancellor of the Exchequer, Philip Hammond, who was tapped on Wednesday by Theresa May, Britain’s new prime minister. Mr. Hammond said in an interview with the BBC on Thursday that the uncertainty was “damaging our economy.” He added that it was necessary to “send signals of reassurance about the future” to get “investment starting to flow into the U.K. economy again.” The issue of uncertainty has been echoed by the new chancellor of the Exchequer, Philip Hammond, who was tapped on Wednesday by Theresa May, Britain’s new prime minister. Mr. Hammond said in an interview with the BBC on Thursday that the uncertainty was “damaging our economy.” He added that it was necessary to “send signals of reassurance about the future” to get “investment starting to flow into the U.K. economy again.”
In the aftermath of the vote, Mr. Carney has sought to reassure investors, saying the central bank has several tools available to stabilize the market, including making 250 billion pounds, or about $331 billion, available as a backstop to keep the system functioning. The central bank has also lowered the amount of capital that banks were required to keep in reserve, which would in theory allow them to lend more to consumers and businesses. The central bank, on Thursday, again pointed to potential signs of stress following the vote. Some businesses were beginning to delay investment projects and postpone recruitment, while consumer sentiment was weakening.
The Bank of England’s Monetary Policy Committee on Thursday voted 8 to 1 to maintain its benchmark interest rate at 0.5 percent, where it had remained unchanged since March 2009. “This evidence suggested the uncertainty flowing from the referendum result was likely to depress economic activity in the near term,” the central bank assessed, according to the minutes of the Monetary Policy Committee of the Bank of England.
Even so, the central bank decided to take a wait-and-see attitude before making another move. The financial system, it noted, looked resilient in the wake of the referendum, while banks remained on solid ground in terms of capital.
“The Bank of England has decided that patience is a virtue,” said Paul Diggle, an economist at Aberdeen Asset Management. “There’s going to be a bit of disappointment in financial markets. They had taken Carney’s earlier comments about easier monetary policy to heart and forgot his reputation for changing his mind.”
Following the central bank decision, the FTSE 100, a stock index that measures the largest companies traded in London, initially dropped nearly 70 points. But it bounced back later in the day.
Mr. Diggle said that the committee would have more economic data points and forecasts to digest at its meeting in August. “The market should get its way then, with an interest rate cut likely and renewed quantitative easing possible,” he said.
In the aftermath of the vote, Mr. Carney has sought to reassure investors, saying the central bank has several tools available to stabilize the market.
He made 250 billion pounds, or about $331 billion, available as a backstop to keep the system functioning. The central bank has also lowered the amount of capital that banks are required to keep in reserve, which would in theory allow them to lend more to consumers and businesses.
In the prelude to the rate decision, a number of economists and analysts had predicted that the bank would lower the rate by 25 basis points, particularly in light of Mr. Carney’s earlier comments, and possibly reduce it further in August. There also was a belief that the committee could increase the size of the bank’s bond-buying program, a policy known as quantitative easing that injects cash into the economy and helps keeps rates down.
But the central bank, for now, is keeping those two major tools in reserve, as it awaits more concrete data.
The Bank of England’s Monetary Policy Committee on Thursday voted 8 to 1 to maintain its benchmark interest rate at 0.5 percent, where it had remained unchanged since March 2009. It will also keep the bond purchasing program at the same level, £375 billion, as it has been for the past four years.
“The committee had taken some reassurance from the evidence that markets had continued to function effectively throughout the period,” according to the committee’s minutes. “The overall resilience of the U.K. financial system, and the flexibility of the regulatory framework, had allowed the impact of the referendum result to be dampened rather than amplified.”“The committee had taken some reassurance from the evidence that markets had continued to function effectively throughout the period,” according to the committee’s minutes. “The overall resilience of the U.K. financial system, and the flexibility of the regulatory framework, had allowed the impact of the referendum result to be dampened rather than amplified.”
As a result, a majority of the committee felt it was “appropriate to leave the stance of monetary policy unchanged at this meeting,” according to the committee’s minutes. But most of the committee expected “monetary policy to be loosened in August.” The central bank is also expected to unveil in August its updated forecast for inflation, an important metric for the bank’s monetary policy decisions. The next steps will depend on the data.
The central bank is expected to unveil in August its updated forecast for inflation, an important metric for the bank’s monetary policy decisions. The bank also will keep its eye on the extent to which economic activity has slowed since the referendum — from housing starts to hiring.
One member of the committee, Gertjan Vlieghe, already felt a cut was warranted, pointing in part to the “outlook for medium-term inflation — even taking into account the boost from the lower level of sterling.” And the committee broadly suggested a rate cut was likely next month.
“Whatever the economic merits or demerits of cutting interest rates at this juncture, the lack of clear direction is more likely to add to economic uncertainty and therefore be detrimental to demand and the economy,” said Angus Armstrong, the director of macroeconomics at the National Institute of Economic and Social Research.