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Contrary to expectation, Bank of England holds interest rates

The Bank of England has surprised financial markets by keeping Bank Rate on hold at 0.5%.

Ahead of the announcement made yesterday by Bank of England governor, Mark Carney, markets were pricing in an 80% likelihood of a rate cut. There was also expectation by some that the central bank’s quantitative easing programme would resume too.

In a speech which Carney made following the EU referendum’s Brexit outcome, he said that the UK’s economic outlook had subsequently deteriorated, and went on to suggest that the Bank would cut rates or start quantitative easing this summer.

A full assessment and a new forecast will be published by the Bank of England this August, but experts are saying that it is unlikely the bank will cut rates below zero, due to the negative impact it would have on banks.

Mike Bell, global market strategist at JP Morgan Asset Management, said:

“Since the vote, UK consumer confidence, hiring intentions, business expectations and the construction outlook have all fallen. The declines in consumer and business confidence put the UK’s economic recovery at risk with growth likely to be meaningfully weaker than otherwise and with the risk of recession elevated.

“While the fall in sterling, combined with the rise in oil prices, will inevitably lead to a sharp increase in headline inflation over the coming year, the Bank of England will be more concerned by the downside risks to economic growth than the upside risk to inflation.”

Base rate was first cut to 0.5% in March 2009, and has not been revised since.

David Whittaker, managing director, Mortgages for Business, added:

“Many will be surprised by the MPC’s decision to keep Bank Rate at 0.5%, especially given Mark Carney’s hints that the record-low rate could be too high in the wake of the referendum’s result. But a surprise can be good news. The economy has perhaps been more robust than many expected it to be and the Committee makes clear it believes the balance between inflation and growth remains stable.

“Even if Bank Rate had been cut there would be little room for improvement. Mortgage rates are already at record lows and there is little room for them to go much lower. Inter-lender competition has played a significant part in this and with yields on swaps and UK gilts remaining near record lows, mortgage borrowers will continue to benefit from enhanced affordability for some time. Property investors with sound financial planning and a long-term outlook are therefore well placed to take advantage of continued generous pricing.

“Property prices could be a little bumpy in the short term – and the MPC has highlighted a weakening of activity in the housing market. This might trim some short-term capital gains on offer but in the long-term, the outlook for investors remains positive. Supply of housing in the UK remains significantly out of sync with demand which will support price increases over coming years. Furthermore, high levels of demand for rental accommodation will provide landlords with strong yields.”