Bank of England wrong-foots markets as it leaves rates unchanged
The Bank of England wrong-footed investors by keeping interest rates on hold yesterday, but held out the prospect of a stimulus package soon to help the economy cope with Britain's decision to leave the European Union.
The battered pound surged by more than 2pc as the central bank held its Bank Rate at 0.50pc, contrary to widespread expectations of a first cut in more than seven years.
Governor Mark Carney said two weeks ago that he expected the bank to give the economy more help over the summer.
But the bank's rate-setters said yesterday they would wait three more weeks to see the intensity of the Brexit hit to Britain's economy before deciding on the need for any stimulus.
"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," minutes of the meeting said.
"The precise size and nature of any stimulatory measures will be determined" in August, it said.
Only one of the Monetary Policy Committee's nine rate-setters - Jan Vlieghe, who has previously floated the idea of more help for the economy - voted for a cut at the July meeting.
The bank has held its Bank Rate at 0.5pc since March 2009, when the global financial crisis was hammering Britain and investors have spent much of the past three years speculating about when borrowing costs would rise as the economy ticked up.
Now the question investors and businesses are asking is whether Britain can avoid falling back into recession.
Economists taking part in a Reuters poll had mostly expected a halving of the Bank Rate to 0.25pc yesterday, to be followed by a revival of the bank's £375bn (€450bn) bond-buying programme at its next meeting on August 4.
Chris Williamson, chief economist with data firm Markit, said the bank had opted not to rush into "a knee-jerk reaction" to the Brexit vote.
But he said it would "need to do a lot more to shore up confidence and keep the gears of the economy turning."
The surprise decision to keep rates on hold pushed sterling to a two-week high against the US dollar of $1.3480.
Mr Carney met Britain's new Chancellor of the Exchequer, Philip Hammond, yesterday shortly after Mr Hammond suggested a more gradual approach to cutting the budget deficit. (Reuters)