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UK interest rates held at 0.5%

The Bank of England has held the UK’s main interest rate at 0.5% despite speculation that it would cut rates.

The Monetary Policy Committee voted 8-1 to leave rates unchanged, but minutes of the meeting showed most members expect the Bank will take some action next month.

Sterling rose as high as $1.3480 before falling back to $1.3326, while the FTSE 100 posted modest gains.

Financial markets had priced in an 80% chance of the Bank cutting rates.

The Bank said: “The precise size and nature of any stimulatory measures will be determined during the August forecast and Inflation Report round.”

Only one member of the MPC, Jan Vlieghe, voted for a rate cut this month.


Analysis: Kamal Ahmed, BBC economics editor

The MPC is dealing with two competing forces. First, a slowdown in economic growth following the referendum vote, which many economists believe could tip the economy into recession.

Second, a possible increase in inflation sparked by the fall in the value of sterling. At the moment, the data on the former is limited.


The Bank said that some businesses were starting to delay investment projects and postpone recruitment decisions, while a “significant weakening” in activity in the housing market was expected.

Figures released earlier on Thursday showed interest among UK homebuyers fell to its lowest level since mid-2008.

“Taken together, these indicators suggest economic activity is likely to weaken in the near term,” it said.

The Bank also said it expected “sizeable falls” in commercial real estate prices in the short term.

However, the MPC raised its expectation for economic growth in the three months to June to 0.5% from a previous forecast of 0.3%.

Rock bottom

Aberdeen Asset Management economist Paul Diggle said the Bank had decided that patience was a virtue.

“The next meeting is only three weeks away, and by then Carney and his colleagues will have a few extra post-referendum data points to digest, as well as a new set of forecasts,” he said.

“The market should get its way then, with an interest rate cut likely and renewed quantitative easing possible.”

Ben Brettell, senior economist at Hargreaves Lansdown, said: “It looks almost certain that looser policy will be necessary at some stage to counteract the economic uncertainty posed by the Brexit vote… Rates could conceivably remain at rock bottom for the next five to 10 years.”

Philip Hammond
New Chancellor Philip Hammond meet Bank of England Governor Mark Carney on Thursday

 

However, Angus Armstrong, director of macroeconomics at the National Institute of Economic and Social Research, was more critical: “The lack of clear direction is more likely to add to economic uncertainty and therefore be detrimental to demand and the economy.”

Returns on UK government bond yields rose sharply, with the 10-year yield rising about four basis points to 0.815% after the decision, before easing back to 0.8%.

Earlier on Thursday Bank Governor Mark Carney met the new Chancellor, Philip Hammond, who said the Government would do whatever was needed to restore confidence in the UK economy.

Interest rates have remained on hold since the Bank cut to the record low of 0.5% in March 2009.

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