Investors have been left uncertain over how the Bank of England (BoE) will act to stimulate the UK economy after it surprised markets by keeping rates on hold at 0.5 per cent today (July 14).
The central bank’s Monetary Policy Committee (MPC) voted 8-1 against cutting rates today, contrary to widespread expectations that the base rate would be halved to 0.25 per cent. The committee also unnanimously voted to not increase quantiative easing.
Notes from the meeting saw the committee take the unusual step of explictly saying monetary policy loosening may well be on the card’s in August, a decision which will be made public at the same time as the BoE’s quarterly Inflation Report.
While some praised the BoE’s caution, others suggested next month’s policy measures may not take the form of a rate cut.
Mitul Patel, head of interest rates at Henderson, resurrected the idea of BoE governor Mark Carney being an “unreliable boyfriend”, a phrase first used in 2014 when Mr Carney abandoned his forward guidance policy.
“[The BoE] has indicated that easing is on the way in August, but given the UK is facing the biggest shock since the financial crisis, if they don’t feel like they can go in a non-inflation report month now, then when can they?”
”[The BoE hasn’t] been explicit on what form easing will take, and while the market still expects rate cuts, this isn’t a given. Currently the market is pricing an August rate cut, but the mix between rate cuts, quantitative easing and other measures remains to be seen,” he added.
Royal London Asset Management head of derivatives Darren Bustin suggested central bank officials, including Mr Carney, had again shown their unreliability by not cutting rates. He described the outcome “another example of forward misguidance”.
Mr Bustin said the inconsistency would put doubts in investors’ minds over next month’s decision.
“Even if action is expected in August, markets may be much more sceptical in the run up to the next MPC meeting against a backdrop of increased uncertainty,” he said.
Next month’s decision is due in just three weeks’ time on August 4, with a limited amount of economic data is due to be released in the intervening period. That suggests the BoE will struggle to point to a change in conditions as the rationale behind its stimulus measures.
Kames investment manager John McNeil said the “delayed rather than postponed” decision could be down to internal debates within the central bank.
“There is likely to be debate within the BoE over the efficacy of various easing measures,” he said.
“The [interest rate] is likely to be cut from the current 0.5 per cent, but the additional stimulus this will provide is moot. There is a sense that there is diminishing marginal returns from purchases of gilts [quantiative easing].
“Credit easing and purchases of private sector assets are likely under consideration. The BoE has clearly judged that further easing will be required, but that they [should] wait till the August meeting to consider the nature and form that these measures will take.”
