Bank of England expects to ease policy rates in August

July 18, 2016 (LBO) – The Bank of England has kept its policy rates unchanged while expecting to ease its monetary policy stance next month after receiving official data on Brexit. At its meeting ending last week, the Monetary Policy Committee has voted by a majority of 8-1 to maintain bank rate at 0.5 percent, with one member voting for a cut in bank rate to 0.25 percent. "The Committee sets monetary policy to meet the 2 percent inflation target and in a way that helps to sustain growth and employment,” the Bank of England said. Twelve-month CPI inflation was 0.3 percent in May and remains below the 2 percent inflation target and measures of core inflation have been stable at a little over 1 percent. “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.” Financial markets have reacted sharply to the United Kingdom’s vote to leave the European Union and since the Committee’s previous meeting, the sterling effective exchange rate has fallen by 6 percent, and short-term and longer-term interest rates have declined. Reflecting the fall in the level of sterling, financial market measures of inflation expectations have risen moderately at short-term horizons, but only to around historical averages, and have fallen slightly at longer horizons.
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The Bank of England said even though official data on economic activity covering the period since the referendum are not yet available, 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,” “Regarding the housing market, survey data point to a significant weakening in expected activity. Taken together, these indicators suggest economic activity is likely to weaken in the near term.”