While it seemed like a foregone conclusion given the recent EU referendum, the uncertain political backdrop and (what seemed like) strong hints from Bank of England governor Mark Carney, the Monetary Policy Committee (MPC) today decided not to cut interest rates from their already historic lows. 
Indeed, only one member of the nine-person committee voted to reduce interest rates from 0.5 per cent – where they have stayed since March 2009 – to 0.25 per cent, despite the fact the overwhelming majority of market commentators expected a loosening of policy to combat the likely negative economic impact of Brexit.
In a statement released earlier today, however, the MPC said it saw no need for a knee-jerk reaction (either in the form of a rate cut or a new quantitative easing programme).
“Markets have functioned well, and the improved resilience of the core of the UK financial system and the flexibility of the regulatory framework have allowed the impact of the referendum result to be dampened rather than amplified,” the MPC said.
Reports suggest that the market had priced in an 80 per cent likelihood the MPC would cut rates – and some analysts thought an even more drastic policy change was needed to support the economy.
“If [Carney] really wanted to signal a clear and aggressive pre-emptive strike to stave off a drop in consumer confidence, growth forecasts and PMIs, he’d cut rates down to 0.1 per cent,” Jordan Hiscott, chief trader at ayondo markets, said yesterday.
As such, it is of little surprise the market reacted wildly as soon as the news broke. The FTSE 100, for example, fell 1 per cent in the space of 10 minutes while bond yields rose by 5 basis points. Sterling also strengthened against the dollar, carrying on its upward trend since the news broke that Theresa May would be replacing David Cameron as prime minister.
Source: Google Finance
However, as the graph above shows, the FTSE then moved upwards but failed to gain any real momentum – so what can investors expect next?
Given the amount of uncertainty surrounding the UK at the moment, here we round up the reaction to Carney and the MPC’s decision to hold rates from leading industry experts.
Pantheon Macroeconomics – “Carney is waiting to assess the damage”
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, says the MPC has held rates due to a lack of hard evidence the UK’s decision to leave the EU will have on the economy.
“In one line: Waiting to assess the damage,” he added.
“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.”
“The committee ‘discussed various easing options and combinations thereof’, suggesting that a Bank Rate cut might be supplemented by more QE. While we continue to expect interest rates to be cut to 0.25 per cent next month, we doubt that the MPC will go further.”
Royal London – “Expect forceful action from the BoE in August”
Trevor Greetham (pictured), head of multi asset at Royal London Asset Management, agrees with Tombs and fully expects a policy change at the next MPC meeting in August. 
“The knee jerk rise in the pound looks like a selling opportunity. Economic data is already coming in weak and we are going to see forceful action from the Bank of England in August.”
“Rising tensions with Europe are also likely to weigh on the pound after what could be a short-lived honeymoon for prime minister Theresa May. A weak pound is part of the medicine the UK economy needs right now.”
IG Group – “Carney is running out of bullets, but expect QE in August”
Joshua Mahony, market analyst at IG, warns that Carney and the BoE are running out of tools to help bolster the economy and support markets.
“Next month’s ‘Super Thursday’ is set to be more super than ever, with the latest inflation and growth estimates that come with an inflation report providing the committee with the clues needed to make a more informed decision.”
“We do expect to see a deterioration in hiring and investment, which will no doubt hit data going forward. As such, some form of action is likely to be taken, if only to preserve the reputation of Mark Carney. However, with UK interest rates already at an all-time low, the committee are fighting a battle with relatively few bullets in the clip.”
“With that in mind, should we see a prolonged period of weakness for the UK economy, it is likely that QE will be wheeled out once more. The prospect of another bout of QE provides FTSE bulls with yet another reason to stay long in what has been one of the most bizarre recent examples of ‘bad news is good news’ for stock markets.”
Columbia Threadneedle – “The BoE doesn’t want to accommodate stagflation”
However, Toby Nangle, head of multi-asset Allocation at Columbia Threadneedle Investments, says it is understandable that the BoE has made no change to its current monetary policy.
“Why not cut rates today to support the economy?” he said.
“In the end it appears that the lack of hard data evidencing economic weakness held them back. Furthermore, there are signs in the minutes that some members appear concerned that they may be drawn into accommodating a stagflationary environment.”
“The impact of the currency falls that came with Brexit on inflation expectations is unknown, and wage growth has been accelerating to an annualised rate of 4 per cent per annum – typically a level that would prompt hawks to talk about raising rates.”
“That said, the Bank has guided the market that it expects to apply monetary easing of some form in August, although remained silent on the form that this easing may take.”
M&G – “The BoE now faces a huge policy challenge”
That being said, M&G investment director Anthony Doyle warns that the movement in currency now puts significant pressure on Carney and co.
“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 2 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.”
Hargreaves Lansdown – “Rates could conceivably remain at rock bottom for the next 10 years”
Turning to investments and Ben Brettell, senior economist at Hargreaves Lansdown, says this decision suggests interest rates will still stay low for a very long period of time. As such, he says the demand for dividend paying equities to continue unabated.
“Interestingly the minutes appear to open the door to more QE, noting that ‘the precise size and nature of any stimulatory measures’ is yet to be determined. Could this be a hint that some members favour measures over and above an interest rate cut?”
“So what does all this mean for savers and investors? Despite today’s decision, the referendum result has kicked the prospect of higher returns on cash into the seriously long grass. Rates could conceivably remain at rock bottom for the next five to 10 years.”
“Clearly this is good news for those with variable rate mortgages, but savers hoping for a return to the ‘normal’ rates seen pre-crisis will be waiting a long time. With gilt and corporate bond yields also ultra-low, I expect savers and investors’ capital will ultimately be committed to equities in search of higher yields.”
