Pound rallies as BOE keeps rates unchanged

UK interest rate remained unchanged at 0.5% and surprised the majority of investors who were anticipating a rate cut. During their meeting, the nation’s Monetary Policy Committee (MPC) took the decision not to proceed with any rate adjustments after a vote 8 to 1.

The one member who voted in favour of the BOE to proceed with an interest rate cut was Jan Vlieghe, a British-Belgian economist who assumed office in September 2015 with the scope to bring in expertise from outside the Bank. UK’s interest rates have been unchanged since March 2009 when they were trimmed to an all-time low of 0.5%.

But even though the result suggests almost everyone’s consent not to take any action, the minutes released by the BOE on Thursday revealed that there is expectation by many of the MPC members that there might be some adjustments during their next meeting on 4th August. The report remained unclear as to the nature of the adjustments and detailed numbers and only mentioned that these will be decided in August.

It is not an easy task for the BOE to decide on whether to take action or not, and more importantly what type of action to take. The bank has to consider the nation’s slowdown of economic growth, according to projections made by a number of economists who also forecast that it could also fall into recession. But their decision also has to be made by taking into account the possibility of inflation’s increase following the devaluation of the British pound, although there is still limited data to work with.

The Bank also commented on the fact that some businesses are hesitating to proceed with their investment plans and projects while it also anticipated a slowdown of buy-sell transactions and development projects within the housing industry. A survey released by the Royal Institution of Chartered Surveyors (RICS) on Thursday forecasts that there might be limited demand in homes during the next three months and this might drive prices low. The survey also predicts that there could also be a decrease in commercial real estate prices.

The GBP/USD on Thursday reacted positively following the BOE interest rate decision and the release of the minutes report. The currency pair’s rate soared as high as 1.34737 and by the end of the day’s trading session it gave up some of the gains and ended with 1.8% increase. On a weekly basis the GBP/USD – also known as the cable – increased by 1.8% and ended Friday’s trading session at 1.31810.

The MPC’s next meeting is a bit more than two weeks time and hence there is valuable time for the BOE to analyse more economic data after the Brexit decision and use it for the calculation of more informed forecasts. Now, even more investors are anticipating a rate cut but until then the markets are not prepared to settle as the economy is still pricing in the impact of the vote to Leave the EU.

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