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Bank of England surprises investors by holding interest rates

The Bank of England’s Monetary Policy Committee (MPC) has surprised investors and economis...
Newstalk
Newstalk

12.34 14 Jul 2016


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Bank of England surprises inve...

Bank of England surprises investors by holding interest rates

Newstalk
Newstalk

12.34 14 Jul 2016


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The Bank of England’s Monetary Policy Committee (MPC) has surprised investors and economists by leaving interest rates on hold at 0.5%.

The MPC was widely expected to cut the cost of borrowing to 0.25% - a new record low - in the face of an expected economic slowdown following the EU referendum.

However, in the event eight of its nine members voted to leave borrowing costs where they are this month.

The decision came a fortnight after the Bank's Governor, Mark Carney, hinted that borrowing costs were likely to come down this summer, saying: "In my view, and I am not pre-judging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer."

However, the committee gave a further hint that rates may indeed be reduced at its meeting next month, which coincides with its quarterly Inflation Report. In the minutes to today's decision, it said: "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."

The decision is likely to cause the pound to rise and may push down share prices, since investors had appended an 80% likelihood on the Bank cutting borrowing costs. But the Bank pointed out that official data on the scale of the impact from Brexit were not yet available. The Bank rarely takes radical action without waiting to update its forecasts, which will happen next month.

However, the minutes revealed that the Bank's agents around the country had detected that "some businesses are beginning to delay investment projects and postpone recruitment decisions."

This was the MPC's first meeting since the vote to leave the EU, a decision it had warned could damage the economy. The minutes from today's meeting said that "a range of influences on demand, supply and the exchange rate could lead to a significantly lower path for growth and a higher path for inflation than in the central projections set out in... May."

According to insiders, the actual decision to leave rates unchanged was taken on Wednesday afternoon, some time before Theresa May was appointed prime minister and made Philip Hammond her Chancellor.

Mr Hammond met Mr Carney to discuss the Bank's decision earlier this morning

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