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BREXIT: no movement on central bank interest rate before August, says Bank of England


The Bank of England has voted not to cut the central bank interest rate for the time being, pending further assessment of the impact of the UK's vote to leave the European Union on the economy, its Monetary Policy Committee (MPC) has announced.

This is part of Out-Law's series of news and insights from Pinsent Masons experts on the impact of the UK's EU referendum. Watch our video on the issues facing businesses and sign up to receive our 'What next?' checklist.

The committee, whose primary role is to set interest rates to meet the UK's 2% inflation target in a way that "helps to sustain growth and employment", voted by a majority of eight members to one to keep the 'bank rate' at 0.5%, and not to carry out any further quantitative easing measures. However, "most" members of the committee expect the position to change following the Bank of England's August forecast, according to the minutes of this week's meeting.

"The MPC has considered the current state of the economy including the immediate impact of the Brexit vote, and balanced this with its desire to bring inflation back to the 2% target," said banking expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com. "This is now the 88th consecutive month that the rate has stayed at 0.5%."

"There must be an underlying concern as well about dropping the rate further and the impact this would have on UK banks' appetite to hold deposits given the liquidity coverage ratios they are currently required to adhere to. Most members of the committee expect there to be a downward movement in August – wait and see," he said.

The Bank of England's Financial Policy Committee (FPC), which is responsible for wider issues of financial stability, reduced the 'countercyclical' buffer of capital that large banks are required to hold from 0.5% of risk-weighted assets to zero until at least June 2017 after its first meeting held after the result of the UK's referendum on EU membership was known.

The 'base rate' was cut rapidly from 5% to 0.5% in a matter of months during the economic crisis of 2008, where it has remained since March 2009. The low interest rate has also been accompanied by a programme of asset purchases, known as quantitative easing (QE), currently valued at £375 billion. QE gives the central bank an additional means of increasing the quantity of money in circulation when interest rates are almost at zero and cannot be cut further.

Gertjan Vlieghe, one of the external members of the MPC, voted to reduce the base rate to 0.25% this month, according to the minutes of the committee's latest meeting (11-page / 9.8MB PDF). However, the majority of MPC members voted to postpone any additional stimulus measures until the Bank of England publishes its updated projections for growth and inflation next month.

"The MPC is committed to taking whatever action is needed to support growth and to return inflation to the target over an appropriate horizon," the minutes of the committee's meeting said.

Since the MPC's meeting in June, which took place a week before the referendum, the sterling effective exchange rate has fallen by 6% and short-term and longer-term interest rates have fallen, the committee said. There are also "preliminary signs" that the result of the referendum had impacted on business and consumer confidence and on the housing market, although no official data is yet available, the committee said.

"Taken together, these indicators suggest economic activity is likely to weaken in the near term," the MPC said.

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