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BoE surprises markets by keeping rates on hold

By Reuters - Jul 14,2016 - Last updated at Jul 14,2016

Buses and pedestrians pass the Bank of England in London on Thursday (AP photo)

LONDON — The Bank of England (BoE) wrong-footed investors by keeping interest rates on hold on Thursday, but held out the prospect of a stimulus package soon to help the economy cope with Britain's decision to leave the European Union.

The battered pound surged by more than 2 per cent as the central bank held its bank rate at 0.5 per cent, contrary to widespread expectations of a first cut in more than seven years.

Governor Mark Carney said two weeks ago that he expected the BoE to give the economy more help over the summer.

But the Bank's rate-setters said on Thursday they would wait three more weeks to see the intensity of the Brexit hit to Britain's economy before deciding on the need for any stimulus.

"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," minutes of the meeting said.

"The precise size and nature of any stimulatory measures will be determined" in August, it said.

Only one of the Monetary Policy Committee's nine rate-setters — Jan Vlieghe, who has previously floated the idea of more help for the economy — voted for a cut at the July meeting.

The BoE has held its Bank Rate at 0.5 per cent since March 2009, when the global financial crisis was hammering Britain and investors have spent much of the past three years speculating about when borrowing costs would rise as the economy picked up.

Now the question investors and businesses are asking is whether Britain can avoid falling back into recession.

Economists taking part in a Reuters poll had mostly expected a halving of the bank rate to 0.25 per cent on Thursday, to be followed by a revival of the BoE's £375 billion ($499 billion) bond-buying programme at its next meeting on August 4.

Chris Williamson, chief economist with data firm Markit, said the BoE had opted not to rush into "a knee-jerk reaction" to the Brexit vote but it would "need to do a lot more to shore up confidence and keep the gears of the economy turning".

 

The surprise decision to keep rates on hold pushed sterling to a two-week high against the US dollar of $1.3480 and British government bond yields rose. British share prices lost some of their earlier gains and housebuilders such as Berkeley and Barratt Developments turned negative.

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