Interest rate remains unchanged at 0.25% and leaves door open to another cut in 2016

In August, the Bank of England cut interest rates for the first time since 2009

Zlata Rodionova
Thursday 15 September 2016 12:00
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The Bank heavily hinted that a rate cut could come later this year to support a weakening economy
The Bank heavily hinted that a rate cut could come later this year to support a weakening economy

The Bank of England’s Monetary Policy Committee (MPC) decided to keep interest rates unchanged at the historic low of 0.25 per cent on Thursday, in line with analysts' expectations but the MPC stuck to its view that they could be cut again later in the year.

Last month, the Bank of England cut interest rates for the first time since 2009, and pushed the button on another £170bn of monetary stimulus to stop the economy sliding back into recession in the wake of the UK’s vote to leave the EU.

The MPC's nine rate-setters were unanimous in their decision to leave interest rates unchanged.

However, the Bank of England also heavily hinted that a rate cut could come later this year to support a weakening economy.

"A majority of members expected to support a further cut in bank rate to its effective lower bound at one of the MPC's forthcoming meetings during the course of the year," the Bank said in the minutes of its latest MPC meeting. The MPC also acknowledged that in recent weeks, economic data coming out of the UK has been stronger than expected since August's rate cut.

The Bank of England's announcement comes after recent data has suggested the economy has so far held up well in the wake of the EU referendum.

Data released by the Office for National Statistics (ONS) earlier on Thursday showed retail sales fell less than expected in August.

The rate of annual consumer price inflation was also left unchanged compared to the previous month, undershooting City analysts’ expectations of a pick-up in the wake of the Brexit vote and the plunge in the value of the pound.

Meanwhile the jobless rate remained at 4.9 per cent in the May-July quarter, according to official figures released on Wednesday.

"Bank of England Governor Mark Carney acted quickly to drop the interest rate to a record low 0.25 per cent last month, promising further cuts if the UK economy worsened following the EU referendum," Dennis de Jong, managing director at UFX.com, said.

"While we’re continuing with a period of uncertainty, the initial hit to the country’s health hasn’t materialised, so there’s no surprises that the rate remains unchanged," he added.

However, economists warned there is still a risk of downturn this autumn with predictions that confidence may slide as the process of actually leaving the EU begins.

“As MPC member Kristin Forbes warned in front of the Treasury select committee, the recent run of strong data must be taken cautiously with a potential downturn around the corner as Brexit negotiations begin and the economy processes the consequences. That suggests the economy isn’t being spooked badly by June’s referendum,” Ana Thaker, market economist at Phillip Capital UK said.

"As long as politicians continue to squabble about the timeframe and negotiating points for the UK’s exit from Europe, Carney will be keeping a very close eye on the situation," Mr De Jong added.

The next MPC meeting will take place in November.

"Unless the stronger than expected current conditions lead to a material upward revision to next year’s GDP growth forecast – which looks unlikely – more likely than not the ultra-dovish MPC will vote to cut the bank rate by a further 15bps to 0.1 per cent before the end of year," said Kallum Pickering of Berenberg.

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