14 July 2016

No change at the Bank of England

Despite economists expecting a rate cut, there was no change.

A recent survey suggested an 80% likelihood of a cut, so the announcement was a surprise and not only that there was no change, but that Mark Carney himself voted for holding rates at 0.5%. This is less surprising than it looks, though.

For a start, the expectation of a rate cut came from comments made by the Governor himself immediately after the referendum, since when the pound has fallen significantly, while the expected interregnum did not materialise, with a new prime minister in place swiftly.

In such circumstances it seems reasonable to hold fire until some hard data emerges wh ich gives the MPC something on which to base a decision. Anyway, with rates so low, the amount of wriggle room the committee has is small, while the experience of Japan suggests that moving rates to zero, or even negative, could have adverse consequences for the banking sector – something the Bank of England will be anxious to avoid.

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