The Bank of England has declined to raise interest rates in the face of increasing economic uncertainty following the UK’s decision to leave the EU, but warned that volatility in property prices might require action in the future.
Monetary policy committee members voted eight to one in favour of keeping the UK’s interest rate at 0.5 percent, despite a majority of market commentators expecting a cut to 0.25 percent.
They also voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion.
A Bank of England statement said: “Committee members made initial assessments of the impact of the vote to leave the EU on demand, supply and the exchange rate. 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.”
But the outlook for the UK is less than rosy, with survey data suggesting that the housing market will suffer a “significant weakening in expected activity” thanks to the uncertainty brought about the 52 percent vote to leave the EU in June.
“There are preliminary signs that the result has affected sentiment among households and companies, with sharp falls in some measures of business and consumer confidence.”
“Early indications from surveys and from contacts of the bank’s agents suggest that some businesses are beginning to delay investment projects and postpone recruitment decisions.”
“Taken together, these indicators suggest economic activity is likely to weaken in the near term.”
Commenting, Darren Ruane, head of fixed interest at Investec Wealth & Investment, said: “It is likely that markets will comprehensively price in the likelihood of a rate reduction in August.”
“The immediate reaction in markets is that UK government bond yields are higher, the FTSE 100 has fallen back by around 70 points (1 percent) to overnight levels and sterling has rallied against both the US dollar and euro.”
