Update: The pound has surged and the FTSE 100 has closed in the red after the Bank of England sprung a surprise on investors by keeping rates on hold.
Sterling jumped 1.5% against the dollar to $1.334 following the Bank’s announcement, which confounded investors, who had been pricing in an 80% probability of a rate cut.
Bank of England governor Mark Carney had signalled in the immediate aftermath of the ‘Brexit’ vote that an interest rate cut was likely. While that has not been delivered today, the Bank said monetary policy was likely to be loosened in August.
With the FTSE 100 closing only marginally lower on the day, Connor Campbell, financial analyst at Spreadex, said the Bank ‘seems to have found a way to please the pound without spooking the rest of the markets’.
‘It was likely the kind of non-action the markets needed at the moment,’ he said. ‘Some may criticise Mark Carney for teasing action in the aftermath of the referendum only to once again go back on his pseudo-promises, but there seems to be a relative consensus in the City that a lack of rash, relatively uninformed decision-making was wise.’
(12:20) Bank dashes rate cut hopes
The Bank of England has dashed expectations of an interest rate cut and kept them on hold at their historic low of 0.5%.
Investors had been anticipating a cut to borrowing costs after Bank of England governor Mark Carney said in the immediate aftermath of the ‘Brexit’ vote that ‘some monetary policy easing will likely be required over the summer’.
In the run-up to the interest rates announcement, markets had priced in an 80% probability of a cut.
The pound surged on the news, jumping 1.6% against the dollar to $1.334 while the FTSE 100 all of the morning’s gains, trading flat at 6,669.
Members of the Bank of England’s monetary policy committee (MPC) voted eight to one to keep rates on hold, with Gertjan Vlieghe voting for a cut to 0.25%.
But the notes of the MPC meeting also kept alive hopes of an interest cut, or relaunched quantitative easing, in August. ‘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,’ they said.
‘The precise size and nature of any stimulatory measures will be determined during the August forecast and inflation report.’
Chris Williamson, chief economist at Markit, said the Bank had chosen against a ‘knee-jerk reaction’ to the ‘Brexit’ vote but that the deterioration in the UK economy meant easing in August was needed.
‘Further stimulus certainly seems likely to be warranted,’ he said. ‘A slowdown in the economy was already severe enough to raise the possibility of monetary stimulus before the 23 June vote, according to surveys of business activity.’
Maike Currie of fund group Fidelity International said the Bank had made the right call. ‘With a new prime minister and cabinet in place, political uncertainty has abated and the Bank of England has wisely decided to keep its powder dry for now,’ she said.
(09:55) FTSE rallies on rate cut hopes
The FTSE 100 has rallied as investors anticipate an interest rate cut from the Bank of England to help the UK economy cope with the economic shock of the ‘Brexit’ vote.
The UK blue-chip index rose 52 points, or 0.8%, to 6,723, with house builders among the biggest risers in anticipation of a boost from cheaper mortgages.
Barratt Developments (BDEV) rose 2.6% to 415.3p, Taylor Wimpey(TW) added 2.2% to 147.5p and Berkeley (BKGH) was up 1.8% at £26.66.
Markets are pricing an 80% probability of an interest rate cut at noon today, after Bank of England governor Mark Carney signalled in the aftermath of the vote to leave the EU that ‘some monetary policy easing will likely be required over the summer’.
But the pound strengthened, up 0.6% against the dollar at $1.322, suggesting investors are not anticipating a drastic move by the Bank, such as a cut to zero.
‘Expectations are for a 25 basis point cut to the headline interest rate with an outside chance of an extension of quantitative easing,’ said Jasper Lawler, market analyst at CMC Markets UK.
‘The threat of “Brexit” and Mark Carney’s desire to get out in front of any problems by easing monetary policy is obviously the reason for the consensus belief. However, markets are perhaps under-pricing the Bank of England’s concern over the negative impact of lowering interest rates on bank profitability.’
