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Interest rates held at 0.25% amid Brexit bounce but further cut still expected

Published 15/09/2016

Bank of England committee voted unanimously to hold rates.
Bank of England committee voted unanimously to hold rates.

The Bank of England has held interest rates at 0.25% but signalled another cut is still on the cards later this year despite a Brexit bounce in the economy.

Minutes of the latest Monetary Policy Committee (MPC) meeting showed all nine members voted to keep the base rate on hold after it was halved last month from 0.5% - the first cut since 2009 - to cushion the blow of the vote to quit the EU.

Policymakers said the immediate impact of the referendum decision on the economy was not quite as bad as first feared, with retail spending and Britain's housing market holding up surprisingly well.

The MPC said it expects "less of a slowing in UK gross domestic product (GDP) growth" in the second half of 2016 and upgraded internal estimates for growth for between 0.2% and 0.3% in the third quarter.

This will be a sharp slowdown on the 0.6% growth seen in the previous three months, although still not as bad as the Bank's predictions in August for growth to almost flatline at around 0.1% between July and September.

It said recent industry data had been stronger than expected.

But the minutes revealed a majority of the MPC are still open to another rate cut, expected to around 0.1%, before the end of the year.

Economists believe the cut will come in November, when the Bank will have its next set of quarterly economic forecasts to hand.

There will not be any MPC meeting next month, with the Bank moving to a new timetable that will see it hold just eight meetings in 2017. The next meeting is on November 3.

The MPC confirmed more action was likely unless the economy showed a markedly better-than-expected performance.

The minutes said: "The committee's view of the contours of the economic outlook following the EU referendum had not changed.

"News on the near-term momentum of the UK economy had, however, been slightly to the upside relative to the August inflation report."

On November's inflation report, it said: "If, in light of that full updated assessment, the outlook at that time was judged to be broadly consistent with the August inflation report, a majority of members expected to support a further cut in bank rate ... during the course of the year."

The pound fell nearly a cent to 1.32 US dollars and was 0.3% lower at 1.17 euros after the minutes.

Bank governor Mark Carney told MPs last week the August move to cut rates and unleash a stimulus package worth up to £170 billion had already begun to buoy the economy.

Official figures out separately on Thursday showed retail sales falling by a far less-than-predicted 0.2% month-on-month in August, while they leapt by more than 6% year-on-year.

The Bank said in its MPC minutes it was also now expecting a smaller rise in inflation over the second half of 2016, with inflation holding steady at 0.6% in August.

But the Bank is still pencilling in a rise to around its 2% target during the first half of 2017.

Neil Wilson, a markets analyst at ETX Capital, said: "It's not quite got egg on its face, but the Bank had to admit that a number of indicators of near-term economic activity have been somewhat stronger than expected."

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