Bank of England Leaves Interest Rate Unchanged

The GBP today remained above $1.32 as the Bank of England’s announcement concerning interest rates and monetary policy outlook was mostly in conformity with their anticipations, this led some investors to cut down on trades placed against the currency. The chances of a rate cut by the BoE later this year has also grown after comments made by the BoE, “it said the initial Brexit hit to Britain's economy would be less severe than it expected only last month. That view underpinned the currency”, traders said.

The BOE said evidence on the initial impact of its August stimulus is encouraging, noting narrower corporate-bond spreads, lower mortgage rates and gilt yields as well as an increase in asset prices.

“The committee would monitor closely changes in asset prices and in interest rates facing households and firms and their effect on economic activity,” it said.

While the nine-member Monetary Policy Committee noted that the recent near-term data had been stronger than anticipated since the Brexit vote, it couldn’t draw inferences for its longer-term forecasts. Even though initial reports had been “slightly to the upside” of projections published in August, officials said their view of the “contours of the economic outlook” hadn’t changed.

The Bank also stated that “nine rate-setters were unanimous in their decision to keep Bank Rate at its new record low of 0.25 percent”. They also voted 9 to 1 to maintain the Bank’s current bond buying programme target at 435 billion pounds and to further its new plan to purchase as much as 10 billion pounds worth of corporate bonds. The GBP was today seen orbiting the 1.3235 level against the USD, standing unchanged for the day in the moments preceding the rate decision. It had climbed to $1.3243 earlier in today after a slump was reported in retail sales at a slower pace than anticipated for the month of August. The Euro was also 0.1% lower on the day as it traded at 84.90 pence.

If the outlook in November were to maintain its “broad consistency” with last month, when the BOE announced a new stimulus package, “a majority of members expected to support a further cut in bank rate to its effective lower bound” later this year. The committee sees that lower limit at close to, but just above, zero.

“They are cautiously optimistic,” said Victoria Clarke, an economist at Investec. “Provided the data shows modest growth in the third quarter overall, they’d probably be happy to cut rates again. If it starts to pick up even more then they’ll probably take a pause and wait and see for another quarter or so.”

"The decision merely reflects what markets already show – the UK economy is holding up very well in the wake of the vote, better than many, including the MPC and governor Mark Carney, had warned," said Neil Wilson, market analyst at ETX Capital. "The announcement was completely baked in to the markets."