Shock, horror? How the City reacted to today’s MPC’s interest rate inaction
Another month, another deferral of The Big Interest Rate Move. That makes 88 so far.
How is the City reacting? Two words: "we're cautious".
Read more: Over to you, Carney – our MPC has voted to cut rates
1. "BoE is playing wait and see"
Michael Martins, economist at the Institute of Directors:
“The Bank of England is playing wait and see for the moment. While the governor has been clear since the Brexit vote that he is poised to act if necessary, it looks like they are waiting to get more data on what is happening in the real economy before making a decision.
"Next week’s official data releases on the public sector finances, inflation, and labour market, which collectively cover the time immediately before and after the referendum, should help them make up their minds before next month’s meeting of the MPC."
2. Signals suggest a hike will happen
Rain Newton-Smith, CBI's chief economist:
“While the Committee has decided to keep rates on hold, the governor has signalled that a range of options are being considered to alleviate the economic uncertainty following last month’s referendum.
“The Bank has indicated that monetary policy may loosen in August, once it has had more time to assess the impact of the Brexit vote on activity.
“Policymakers have several tools at their disposal, and have already taken some measures to pre-emptively ease liquidity bottlenecks and ensure finance continues to flow around the economy.
“Meanwhile, businesses will be looking for a commitment from the new Government to preserve the openness of our economy in terms of access to markets, skills and trade deals.”
3. "The Bank faces a huge challenge"
Anthony Doyle, investment director at M&G's retail fixed interest team:
“Going forward, the BoE faces a huge policy challenge. If the MPC acts in August, it would be highly unusual for an inflation targeting central bank to be cutting rates in the face of higher inflation.
"We expect the pound to come under further pressure in the months ahead and expect that the MPC will continue to use monetary policy to support economic growth rather than target inflation. As a result, inflation is likely to rise and could breach the BoE’s inflation target of two per cent in 2017.
"The BoE did a good job of retaining its credibility after the financial crisis in a similar stagflationary environment in 2010-11 but it remains to be seen whether the market will view the rise in inflation as temporary as it has done previously."
4. "A courageous move"
David Morrison, senior market strategist at Spreadco:
"I think it was a very brave decision by the MPC. And I don’t mean it was foolhardy either. I think it was a courageous move.
"However, the MPC’s summary has made it clear that most members expect monetary policy to be loosened at next month’s meeting. But that seems eminently reasonable as they will have had more time to consider the ongoing impact of the Brexit vote.
"The MPC stated that despite a fall in sterling, markets have functioned well. However, the committee has seen evidence that businesses are delaying investment projects and postponing recruitment decisions. Activity in housing has slowed. Overall, the MPC still believes that the UK may experience lower growth and higher inflation as a result of its exit from the EU."
6. QE next?
Dean Turner, economist at UBS Wealth Management:
"This is not the end of the story. Our view is that the Bank of England will begin the process of lowering rates in August, and potentially discuss other measures such as an extension of the quantitative easing programme.
"We expect to see a measured approach to cutting rates, with gradual decreases over time."
7. Time for the government to step up
Maike Currie, investment director for personal investing at Fidelity International
“As we have seen in Japan and Europe, monetary policy can only go so far and then you need the government to step up to the plate by financially stimulating the economy.
"The course for the new chancellor Philip Hammond is clear: it’s time to wave good-bye to the age of austerity and usher in an era of lower taxes and government spending.
"This effectively means increasing the rate of growth of public debt – a marked u-turn from former chancellor George Osborne’s plan of paying off the nation’s credit card. More debt might sound undesirable, after all we’re hardwired to dislike debt, but total debt matters much less than the affordability of that debt. And currently with the lowest interest rates that we have ever seen, Britain’s debt is cheap."
8. The MPC is taking a cautious approach
Samuel Tombs, chief UK economist, Pantheon Macroeconomics:
"The minutes of July’s meeting signal that the MPC wants to take a cautious, evidence-based approach to assessing how much extra stimulus is warranted. The minutes were clear in stating that 'most members of the Committee expect monetary policy to be loosened in August', when they will have to hand the new Inflation report forecasts and more evidence of the referendum’s impact on the economy."